10-K 1 rjet12311410k.htm 10-K RJET 12.31.14 10K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM ______________ TO _____________

COMMISSION FILE NUMBER: 000-49697

REPUBLIC AIRWAYS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
 
06-1449146
(I.R.S. Employer Identification Number)
 
8909 Purdue Road, Suite 300, Indianapolis, Indiana 46268
(Address of principal executive offices) (Zip Code)

(317) 484-6000
(Registrant’s telephone number, including area code)
 _____________________________

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes   o   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of ”large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The aggregate market value of Common Stock held by non-affiliates (based upon the closing sale price of the Common Stock on the NASDAQ National Market System (now the NASDAQ Global Market System) on June 30, 2014 was approximately $541,327,920.

Indicate the number of shares outstanding of the registrant’s Common Stock as of the latest practicable date: As of February 27, 2015, 50,137,187 shares of common stock were outstanding.
 
 DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

1




 
TABLE OF CONTENTS

 
Part I
 
 
 
 
Item 1.
Business     
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties   
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 
Part II
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
 
Part III
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
 
Part IV
 
 
 
 
Item 15.
Exhibits, Financial Statements Schedules
Signatures
 
 
 
 

2




Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. Republic Airways Holdings Inc. (the “Company”) may, from time to time, make written or oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements encompass our beliefs, expectations, hopes or intentions regarding future events. Words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other terminology are used to identify forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. Our results could differ materially from those anticipated in these forward-looking statements for many reasons, including, among others, the “Risk Factors” set forth herein.

3




PART I
ITEM 1. BUSINESS

General
 
Overview
 
We are a Delaware holding company organized in 1996 that offers scheduled passenger services through our wholly-owned operating air carrier subsidiaries: Chautauqua Airlines, Inc. (“Chautauqua”) through December 31, 2014, Shuttle America Corporation (“Shuttle”) and Republic Airline Inc. (“Republic Airline”). Unless the context indicates otherwise, the terms the “Company,” “we,” “us,” or “our,” refer to Republic Airways Holdings Inc. and our subsidiaries.

As of December 31, 2014, our operating subsidiaries offered scheduled passenger service on 1,229 flights daily to 101 cities in 38 states and Canada under scheduled passenger service through our fixed-fee code-share agreements with United Continental Holdings, Inc. ("United"), Delta Air Lines, Inc. ("Delta"), and US Airways/American Airlines Group, Inc. ("American") (collectively referred to as our "Partners"). Currently, we provide our Partners with fixed-fee regional airline services, operating as United Express, Delta Connection, or US Airways Express/American Eagle, including service out of their hubs and focus cities. The Company operated aircraft under a pro-rate agreement with Frontier Airlines, Inc. ("Frontier") which terminated during the first quarter of 2014.

The following table outlines the types of aircraft our subsidiaries operate and their respective operations within our business units as of December 31, 2014:
 
 
 
 
 
 
 Operating Subsidiaries
 
Aircraft Size (Seats)
 
United
 
Delta
 
US Airways/American
 
Charters/Spares
 
Number of Aircraft
Chautauqua
 
44 to 50
 

 
41

 

 

 
41

Shuttle
 
70 to 76
 
38

 
30

 

 

 
68

Republic Airline
 
69 to 99
 
28

 

 
99

 
8

 
135

Total number of operating aircraft
 
 
 
66

 
71

 
99

 
8

 
244


During 2014, our operational fleet decreased from 258 to 244. The company took delivery of 22 E175 aircraft, permanently parked 15 E140 aircraft, temporarily parked 13 E145 aircraft, sold two E190 aircraft and leased three E145 aircraft and three E190 aircraft.

We have fixed-fee regional jet code-share agreements with each of our Partners that require us to maintain specified performance levels. Pursuant to these fixed-fee agreements, which provide for minimum aircraft utilization at fixed rates, we are authorized to use our Partners' two-character flight designation codes to identify our flights and fares in our Partners' computer reservation systems, to paint our aircraft in the style of our Partners, to use their service marks and to market ourselves as a carrier for our Partners. Our fixed-fee agreements have historically limited our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple major airlines has enabled us to reduce our dependence on any single airline, allocate our overhead more efficiently among our Partners and reduce the cost of our services to our Partners.

Sale of Frontier

In October 2013, the Company entered into a stock purchase agreement for the sale of Frontier to an affiliate of Indigo Partners LLC. The sale was consummated on December 3, 2013. As a result, the Company reported Frontier as discontinued operations on the consolidated statements of operations and consolidated statements of cash flows for all periods presented.

4




Certificate Consolidation

On January 1, 2015, Republic completed its consolidation of all Chautauqua Airlines operations onto the Shuttle America operating certificate. All operating aircraft and related employees are now transferred to Shuttle America's operation. Republic hopes to sell the remaining Chautauqua Airlines' entity and related assets during the first half of 2015. The consolidation is consistent with the Company's strategy to simplify its business by operating fewer fleet types on fewer certificates.

Fleet Transition
    
On September 16, 2014, the Company entered into new agreements and amended certain of their existing agreements resulting in (a) an increase of 50 E175 aircraft to be flown for United under the Company's United Express Agreement with United to be placed in service from the third quarter of 2015 to fourth quarter of 2017, (b) a corresponding increase in the number of aircraft to be purchased from Embraer S.A. (formerly known as Embraer-Empresa Brasileira de Aeronautica S.A.) ("Embraer") under the Company's Amended and Restated Purchase Agreement with Embraer, (c) the wind down of all Q400 aircraft in the Company's Capacity Purchase Agreement ("CPA") with United, and (d) the sublease of 24 Q400 aircraft to Flybe Limited pursuant to a Master Sublease Agreement and the return of three Q400 aircraft to the lessor in January of 2015. In January 2015, the Company finalized amendments to its agreements with United and Embraer to increase the number of E175 aircraft deliveries by five, to 55.

In December 2014, we completed the sale of two E190 aircraft and executed an agreement to sell three other E190 aircraft. The sale of these five aircraft will leave us with two owned E190 aircraft and three leased E190 aircraft that are expected to be removed from fixed-fee charter service in August of 2015. We expect to return the three leased aircraft to the lessor in 2015 and the remaining two aircraft are under a firm sales agreement.

Business Strategy

Develop culture that attracts and retains qualified airline professionals - Working together, we will provide the safest, most reliable and most convenient travel experience for our passengers and a positive work environment for our associates. We strive to make our Company the employer of choice for regional airline professionals, enabling us to develop mutually beneficial working relationships with our business partners.

Continue to operate a high-quality fleet of aircraft across an efficient network - We intend to maintain a modern, high-quality fleet of regional aircraft that meets or exceeds stringent industry operating standards and complies with the terms of our fixed-fee regional aircraft code-share agreements. Our operations are concentrated in the Northeast and Midwest and we staff our crew and maintenance bases to leverage our resources across our network. See route map on page 6.

Continue to provide efficient and effective solutions to our Partners - We have strong, long-term relationships with each of our Partners and have historically worked together with them to meet their operational and network needs. Historically, we have provided safe, reliable, and cost-efficient solutions for our Partners. We remain focused on anticipating and continuing to assist our Partners with their business strategies.

Continue to simplify our operating fleet by operating only larger regional jets - Network carrier consolidation, along with historically high fuel prices, has limited the economic use of smaller regional jets. The Company is actively seeking opportunities to transition out of its 50-seat operational fleet with the ultimate objective to operate a single fleet type.

 Markets and Routes

Markets
 
As of December 31, 2014, we offered scheduled passenger service on 1,229 flights daily to 101 cities in 38 states and Canada.

5




Routes

Our Partners determine the routes that we operate for them, which are subject to certain parameters in our agreements.  The following table illustrates the major hubs of our Partners into which we operated significant levels of service as of December 31, 2014:
Partner
 
Hub and Focus Cities
Delta
 
New York, NY (LGA and JFK); Detroit, MI (DTW); Cincinnati, OH (CVG)
United
 
Chicago, IL (ORD); Newark, NJ (EWR); Denver, CO (DEN); Houston, TX (IAH)
US Airways/American
 
Charlotte, NC (CLT); Philadelphia, PA (PHL); Washington Reagan (DCA); Chicago, IL (ORD); Miami, FL (MIA)

Routes

The following route map illustrates the routes we flew for our Partners as of December 31, 2014:




6




Maintenance of Aircraft and Training
 
Using a combination of Federal Aviation Administration (“FAA”) certified maintenance vendors and our own personnel and facilities, we maintain our aircraft on a scheduled and "as-needed" basis. We emphasize preventive maintenance and inspect our aircraft engines and airframes as required.

The following table represents our maintenance agreements for engines, auxiliary power units ("APU") and other airframe components for our E145, E170/175 and Q400 aircraft:
 
 
Expiration Date of Agreement:
Maintenance Agreements
 
E145
 
E170/175
 
Q400
Engines
 
December 2017(2)
 
March 2027(3)
 
June 2021(2)
APU
 
December 2016
 
July 2019
 
July 2021
Avionics
 
December 2017
 
April 2023
 
NA(1)
Wheels and Brakes
 
December 2019
 
January 2022
 
August 2022 (4)
Parts Pooling
 
December 2017
 
February 2027
 
July 2021
Emergency Slides
 
NA(1)
 
December 2024
 
NA(1)
Tires
 
NA(1)
 
NA(1)
 
July 2021
Propellers
 
NA(1)
 
NA(1)
 
July 2021

(1) Agreements do not exist for the specified maintenance item for the related aircraft type.
(2) Maintenance agreements for engines include life limited parts ("LLPs") for E140/145 and Q400 aircraft. As of
December 31, 2014 and 2013, we had maintenance deposits of $53.2 million and $36.6 million, respectively, for the future replacement of LLPs.
(3) Maintenance agreements for engines on United and Delta E175 aircraft expire December 2018, US Airways E175 aircraft expire December 2022, and American E175 aircraft expire March 2027.
(4) 
Q400 maintenance agreements do not include wheels.

Under these agreements, we are charged for covered services based on a fixed rate for each flight hour or flight cycle accumulated by the engines or airframes in our service during each month. The rates are subject to annual revisions, generally based on certain Bureau of Labor Statistics' labor and material indices.  We believe these agreements, coupled with our ongoing maintenance program, reduce the likelihood of unexpected levels of engine, APU, avionics, wheels and brakes, emergency slides, and select rotable parts maintenance expense during their term. Certain of these agreements contain minimum guarantee amounts, penalty provisions for either the early removal of aircraft or agreement termination for activity levels below the minimums.

We perform our heavy and overnight maintenance at our facilities in Columbus, Indianapolis, Louisville, Pittsburgh and Kansas City, and we perform routine maintenance services from select line maintenance locations.
 
All mechanics and avionics specialists employed by us have appropriate training and experience and hold required licenses issued by the FAA. We provide periodic in-house and outside training for our maintenance and flight personnel and also take advantage of manufacturers’ training programs that are offered when acquiring new aircraft.
 
We have agreements with Flight Safety International to provide for aircraft simulator training for our pilots. We have no current plans to acquire our own simulator in the near term and believe that Flight Safety or other third party vendors will be able to provide us with adequate and cost effective flight simulator training for our pilots.

7




Employees
 
As of December 31, 2014, we employed 5,935 full-time equivalent employees. The following is a table of our principal collective bargaining agreements and their respective amendable dates as of December 31, 2014:

Employee
Group
 
Number of Full-
Time Equivalent
Employees
 
Representing Union
 
Amendable
Date
Pilots
 
2,116
 
International Brotherhood of Teamsters Airline Division Local 357 (Chautauqua, Republic, and Shuttle)
 
*Oct-07
Flight Attendants
 
2,001
 
International Brotherhood of Teamsters Airline Division Local 135
 
Jul-18
Dispatchers
 
85
 
Transport Workers Union of America Local 540
 
Aug-18
 _______________________
* The Company and IBT Local 357 continue to work towards a new labor agreement.

The Company is currently in a labor dispute with the International Brotherhood of Teamsters ("IBT") Local 357, which represents all of our pilots.  On April 4, 2014, the Company announced that members of the IBT Local 357 failed to ratify a proposed four-year pilot labor agreement, which would have increased pay, improved work rules and allotted a significant signing bonus to our pilots.  Our inability to pay our pilots, especially our new hire first officers, market level wages is negatively impacting our ability to hire qualified pilots and operate the number of aircraft our Partners desire for us to fly under fixed-fee agreements.  In 2014, we did not renew agreements to operate 27 Embraer Regional Jet ("ERJ") aircraft and permanently parked 15 E140 aircraft, temporarily parked 12 E145 aircraft and temporarily parked an operational spare. The Company may need to park additional ERJ aircraft in 2015 and 2016 as a result of the current labor dispute, which could cause us to fail to meet the required performance levels under our CPAs.

As of December 31, 2014, we had 1,733 employees who are not currently represented by any union.  Because of the high level of unionization among our employees, we are subject to risks of work interruption or stoppage and/or the incurrence of additional expenses associated with union representation of our employees. 




    

    

8




Code-Share Agreements

Through our subsidiaries, we have entered into code-share agreements with US Airways, American, Delta, and United (the "Partners") that authorize us to use their two-character flight designator codes ("US," "AA," "DL," and "UA") to identify our flights and fares in their computer reservation systems, to paint our aircraft with their colors and/or logos, to use their service marks and to market and advertise our status as US Airways Express, American Eagle, Delta Connection, or United Express, respectively. Under the code-share agreements between our subsidiaries and each of US Airways, American, Delta, and United, we are compensated on a fixed-fee basis on all of our flights. In addition, under our code-share agreements, our passengers participate in frequent flyer programs of the Partners, and the Partners provide additional services such as reservations, ticket issuance, ground support services, commuter slot rights and airport facilities.

The following table is a summary representation of existing Capacity Purchase Agreements ("CPAs") with our Partners as of December 31, 2014:
Partner
 
Aircraft Type
 
Seats on Aircraft
 
Number of Aircraft under CPAs
 
Current Expiration Date(s)
US Airways
 
E170
 
69

 
20

 
March 2019 to March 2023
US Airways
 
E175
 
80

 
38

 
March 2019 to March 2023 and February 2019 to July 2020
American
 
E175
 
76

 
41

 
July 2025 to February 2027
Delta
 
E145
 
50

 
41

 
August 2015 to May 2016
Delta
 
E170
 
70

 
14

 
May 2021 to October 2021
Delta
 
E175
 
76

 
16

 
August 2023 to February 2024
United
 
E170
 
70

 
38

 
September 2019 to December 2022
United
 
Q400
 
71

 
28

 
January 2015 to September 2016

US Airways/American Code-Share Agreements

On December 9, 2013, US Airways Group, Inc. became a wholly owned subsidiary of American Airlines Group, Inc. (formerly known as AMR Corporation). The Company continues to operate the capacity purchase agreements with both entities independently as the agreements have not been assigned to the merged organization.

Under our fixed-fee Jet Services Agreements with US Airways, we operated, as of December 31, 2014, 20 E170 aircraft and 38 E175 aircraft. As of December 31, 2014, we were providing 355 flights per day as US Airways Express.

In exchange for providing the designated number of flights and performing our other obligations under the code-share agreements, we receive compensation from US Airways three times each month. We receive an additional amount per available seat mile flown and may also receive incentives or pay penalties based upon our performance, including fleet launch performance, on-time departure performance and completion percentage rates. In addition, certain operating costs are considered pass through costs whereby US Airways has agreed to reimburse us the actual amount of costs we incur for these items. Landing fees, passenger catering, passenger liability insurance and aircraft property tax costs are pass through costs and are included in our fixed-fee services revenue. US Airways provides fuel directly for all of our US Airways operations.

On November 6, 2014, the Company entered into an Amendment to the Amended and Restated Jet Service Agreement with US Airways, Inc., dated as of September 2, 2005. Under the amendment, the code-share agreement for the E170/175 aircraft was extended and now terminates between March 2019 and March 2023 with respect to the 20 E170 aircraft and eight of the E175 aircraft.   The service terms for the remaining 30 E175 aircraft were not extended and are scheduled to terminate 12 years from each aircraft’s in-service date and therefore would terminate from February 2019 to July 2020. US Airways may terminate the code-share agreements at any time for cause upon not less than 90 days notice and subject to our right to cure under certain conditions.

As of December 31, 2014, we operated 41 E175 aircraft for American under a fixed-fee code-share agreement and provided 224 flights per day as American Eagle.


9



Under the code-share agreement, American retains all passenger, certain cargo and other revenues associated with each flight and is responsible for all revenue-related expenses. We share revenue with American for certain cargo shipments. Additionally, certain operating costs are considered pass through costs and American has agreed to reimburse us the actual amount of costs we incur for these items.  Landing fees, hull and liability insurance and aircraft property tax costs are pass through costs and included in our fixed-fee services revenue. We do not record fuel expense and the related revenue for the American operations.

As of December 31, 2014, 41 of the 47 aircraft are in service; the remaining six aircraft begin service between January 2015 and May 2015. Unless otherwise extended or amended, the E175 code-share agreement terminates on the 12th anniversary of the implementation date of each aircraft with terms expiring between July 2025 and February 2027. American has the option of extending the E175 agreement with respect to each aircraft for up to two additional two year terms. The agreement is subject to early termination under various circumstances.

On February 28, 2014, the Company announced that it had entered into an Amendment to the Amended and Restated Air Services Agreement with American Airlines Group, Inc. dated as of June 12, 2002. In the Amendment, the parties agreed to remove 15 E140 aircraft from service under the Air Services Agreement between March 2014 and August 2014. Upon removal of the last of the American Removed Aircraft, the Air Services Agreement terminated.

The Delta Code-Share Agreements

As of December 31, 2014, we operated 41 E145 aircraft, 14 E170 aircraft, and 16 E175 aircraft for Delta under fixed-fee code-share agreements.  As of December 31, 2014, we provided 367 flights per day as Delta Connection.

Unless otherwise extended or amended, the code-share agreement for the E145 aircraft terminates in May 2016. Delta may terminate the code-share agreements at any time, with or without cause, if it provides us 180 days written notice, for the E145 regional jet code-share agreement, or after July 2015 for the E175 regional jet code-share agreement. With respect to the E145 agreement, if Delta chooses to terminate any aircraft early, it may not reduce the number of aircraft in service to less than 12 during the 12-month period following the 180 day initial notice period unless it completely terminates the code-share agreement. We refer to this as Delta's partial termination right.

If Delta exercises this right under the E145 agreement or the E175 agreement or if we terminate either agreement for cause, we have the right to require Delta either to purchase, sublease or assume the lease of aircraft leased by us with respect to any of the aircraft we previously operated for Delta under that agreement.  As of December 31, 2014, the Company estimates a payment of $158.8 million and $171.3 million would be required from Delta should they exercise the early termination provision under the E145 or E175 agreement, respectively.  If we choose not to exercise our put right, or if Delta terminates either agreement for cause, they may require us to sell or sublease to them or Delta may assume the lease of aircraft leased by us with respect to any of the aircraft we previously operated for it under that agreement. There is no early termination provision for E170 aircraft under the E175 agreement.

On December 11, 2014, the Company entered into Amendment Number Seven to the Delta Connection Agreement with Delta Airlines, Inc. dated as of January 20, 2005. Under the Agreement, the Company operates 14 E170 and 16 E175 aircraft as Delta Connection. The amendment provides for, among other things, an agreement for Shuttle to operate nine additional E170 aircraft to be placed into service between the third quarter of 2015 and the second quarter of 2016 for a term of six years per aircraft. The amendment also provides for an extension of the air transportation services provided by the Company with respect to the 14 E170 for another four years, for terms ending from May 2021 to October 2021, and extend the 16 E175 aircraft by approximately five years, for terms ending from August 2023 to February 2024. Delta may further extend the service terms for any or all of the 14 E170 and 16 E175 aircraft for an additional five years. The amendment also provides that Delta may purchase any or all of the E175 aircraft for an amount equal to the net book value of such aircraft at the end of the current terms for such aircraft or at any time during the extended terms, in which case Delta would lease the purchased aircraft to the Company for the Company's operation during the remainder of the terms.

Certain of our operating costs are considered pass through costs, whereby Delta has agreed to reimburse us the actual amount of costs we incur for these items. Aircraft rent/ownership expenses are also considered a pass through cost, but the reimbursement is limited to specified amounts for certain aircraft. Engine maintenance expenses, landing fees, passenger liability insurance, hull insurance, war risk insurance, de-icing costs, and aircraft property taxes are some of the pass through costs included in our fixed-fee services revenue. All fuel is purchased directly by Delta and is not charged back to the Company.

The agreements may be subject to immediate or early termination under various circumstances.


10



The United Code-Share Agreement

As of December 31, 2014, we operated 38 E170 aircraft and 28 Q400 aircraft for United under fixed-fee code-share agreements.  As of December 31, 2014, we provided 353 flights per day as United Express.

The fixed rates that we receive from United under the code-share agreements are annually adjusted in accordance with an agreed escalation formula. All fuel is purchased directly by United and is not charged back to the Company. Additionally, certain of our operating costs are considered pass through costs whereby United has agreed to reimburse us the actual amount of costs we incur for these items. Landing fees, war risk insurance, liability insurance and aircraft property taxes are pass through costs and included in our fixed-fee services revenue.  

On February 28, 2014, the Company announced that it had entered into the Fifth Amendment to the Capacity Purchase Agreement with United Airlines dated as of July 21, 2006. In the Amendment, the parties agreed to remove 12 E145 aircraft from service under the CPA Agreement on April 1, 2014. Upon removal of the last of the United Removed Aircraft, the CPA Agreement terminated.

On September 16, 2014, the Company announced that it had entered into an Amendment to Capacity Purchase Agreement amending the Capacity Purchase Agreement dated as of May 1, 2012. The amendment provides for the removal from service of the Q400 aircraft operating under the agreement beginning in January 2015 and ending in September 2016, subject to adjustment of the schedule to accommodate the parties operational schedules.

Also, on September 16, 2014, the Company announced that it had entered into a Seventh Amendment to the United Express Agreement, originally entered into on December 28, 2006. Pursuant to the amendment, the Company agreed to operate 50 E175 aircraft under the United Express brand with service to start in mid-2015. The new aircraft, which will seat 76 passengers in a two-class cabin, are expected to be phased into operation at approximately two to three aircraft per month beginning in mid-2015 through the third quarter of 2017. In addition, United has the option to add up to 50 additional E175 aircraft to the United Express Agreement by providing notice to the Company on or before December 31, 2016. Each new aircraft will be subject to the United Express Agreement for 12 years after the date it is placed in service thereunder, subject to United's right to extend the term for any group of 10 aircraft for four years. In January 2015, the Company finalized amendments to its agreements with United and Embraer to increase the number of E175 aircraft deliveries by five, to 55.

In addition to the foregoing provisions, the amendment extends the term of the UA Express Agreement with respect to the 38 existing E170 aircraft the Company is flying for United by approximately three years, with aircraft terms expiring between September 2019 and December 2022.

United has a call option to assume our ownership or leasehold interest in certain aircraft if we wrongfully terminate the code-share agreements or if United terminates the agreements for our breach for certain reasons.
 
Competition and Economic Conditions

The airline industry is highly competitive. The principal competitive factors in the airline industry are location, fare pricing, frequent flyer loyalty programs, customer service, routes served, flight schedules, aircraft types and code-share relationships. Certain of our competitors are larger and have significantly greater financial and other resources than we do. Moreover, federal deregulation of the industry allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats.

Generally, the airline industry is highly sensitive to general economic conditions, in large part due to the discretionary nature of a substantial percentage of both business and pleasure travel. In the past, many airlines have reported decreased earnings or substantial losses resulting from periods of economic recession, heavy fare discounting, high fuel prices and other factors. Economic downturns combined with competitive pressures have contributed to a number of bankruptcies and liquidations among major and regional carriers. The effect of economic downturns is somewhat mitigated by our fixed-fee code-share agreements with respect to our flights. In addition, if our Partners remain financially strained by current economic conditions or higher fuel prices, they may reduce the number of flights we operate in order to reduce their operating costs.

11




The growth in the fixed fee business for regional carriers has been limited over the past few years as major carriers have reduced capacity and increased fuel prices have limited the cost efficiencies of small regional jets. In addition, recent legislation has increased the number of experience hours that a pilot must generally have logged to 1,500, which has decreased the amount of qualified pilots for all regional carriers. We believe as fixed-fee contracts come up for renewal, there will be competition for market share and pilots which may lead to lower margins and higher risks for regional carriers.

Regulatory Matters
 
Government Regulation

All interstate air carriers are subject to regulation by the Department of Transportation ("DOT"), the Federal Aviation Administration ("FAA"), the Transportation Security Administration ("TSA") and certain other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service, those of the TSA to security and those of the FAA to operations and safety. The FAA requires operating, airworthiness and other certifications; approval of personnel who may engage in flight maintenance or operations activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. Generally, governmental agencies enforce their regulations through, among other mechanisms, certifications, which are necessary for our continued operations, and proceedings, which can result in civil or criminal penalties or suspension or revocation of operating authority. The FAA can also issue maintenance directives and other mandatory orders relating to, among other things, grounding of aircraft, inspection of aircraft, installation of new safety-related items and the mandatory removal, replacement or modification of aircraft parts that have failed or may fail in the future.

We believe that we are operating in material compliance with FAA regulations and hold all necessary operating and airworthiness certificates and licenses. We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. Our flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures.
 
The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain airports, including major airports at Boston, Washington D.C., the New York area, Dallas, Philadelphia, Charlotte, Chicago, Los Angeles, San Diego, Orange County (California) and San Francisco, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. In some instances, these restrictions have caused curtailments in service or increases in operating costs, and such restrictions could limit our ability to commence or expand our operations at affected airports. Local authorities at other airports are considering adopting similar noise regulations.
 
Pursuant to law and the regulations of the DOT, we must be actually controlled by United States citizens. In this regard, our President and at least two-thirds of our Board of Directors must be United States citizens and not more than 25% of our voting stock may be owned or controlled by foreign nationals, although subject to DOT approval the percentage of foreign economic ownership may be as high as 49%.

As of August 1, 2013, Congress created an action that creates new certification and qualification requirements for pilots in air carrier operations.  As a result of this action, a second in command (first officer) in domestic, flag, and supplemental operations must now hold an airline transport pilot certificate and an airplane type rating for the aircraft to be flown.  An airline transport pilot certificate requires that a pilot be 23 years of age and have 1,500 hours total time as a pilot. Pilots with fewer than 1,500 flight hours may qualify for a restricted privileges airline transport pilot certificate beginning at 21 years of age if they are a military-trained pilot, have a bachelor’s degree with an aviation major, or have an associate’s degree with an aviation major under a qualified program from an approved college or university. 

In addition to the new qualification requirement, the FAA has also implemented a new regulation that updates the flight crew duty, flight and rest requirements for pilots.  This update changed the length of time a Pilot may be on duty and how much they may fly in a day, month and year.  These more restrictive limitations have impacted a Pilot's availability and decreased their utilization. 

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Environmental Regulation

The Airport Noise and Capacity Act of 1990 ("ANCA") generally recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as such programs do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. The ANCA generally requires FAA approval of local noise restrictions on commercial aircraft. While we have had sufficient scheduling flexibility to accommodate local noise restrictions imposed to date, our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.

The Environmental Protection Agency ("EPA") regulates operations, including air carrier operations, which affect the quality of air in the United States. We believe the aircraft in our fleet meet all emission standards issued by the EPA. We may become subject to additional taxes or requirements to obtain permits for green house gas emissions.

Safety and Health Regulation

The Company and its third-party maintenance providers are subject to the jurisdiction of the FAA with respect to the Company’s aircraft maintenance and operations, including equipment, ground facilities, dispatch, communications, flight training personnel, and other matters affecting air safety. To ensure compliance with its regulations, the FAA requires airlines to obtain, and the Company has obtained, operating, airworthiness, and other certificates. These certificates are subject to suspension or revocation for cause. In addition, pursuant to FAA regulations, the Company has established, and the FAA has approved, the Company’s operations specifications and a maintenance program for the Company’s aircraft, ranging from frequent routine inspections to major overhauls. The FAA, acting through its own powers or through the appropriate U.S. Attorney, also has the power to bring proceedings for the imposition and collection of fines for violation of the Federal Aviation Regulations.

The Company is subject to various other federal, state, and local laws and regulations relating to occupational safety and health, including Occupational Safety and Health Administration and Food and Drug Administration regulations.

Security Regulation

Pursuant to the Aviation and Transportation Security Act (the “Aviation Security Act”), the TSA, a division of the U.S. Department of Homeland Security, is responsible for certain civil aviation security matters. The Aviation Security Act addresses procedures for, among other things, flight deck security; the use of federal air marshals onboard flights; airport perimeter access security; airline crew security training; security screening of passengers, baggage, cargo, mail, employees, and vendors; training and qualifications of security screening personnel; provision of passenger data to U.S. Customs and Border Protection; and background checks. Under the Aviation Security Act, substantially all security screeners at airports are federal employees, and significant other elements of airline and airport security are overseen and performed by federal employees, including federal security managers, federal law enforcement officers, and federal air marshals.

TSA-mandated security procedures can have a negative effect on the customer experience and the Company’s operations. For example, in 2006, the TSA implemented security measures regulating the types of liquid items that can be carried onboard aircraft. In 2009, the TSA introduced its Secure Flight Initiative. As part of that initiative, the Company has begun collecting additional customer data. The Secure Flight Initiative was created to help reduce the number of passengers who are misidentified as possible terrorists because their names are similar to those of people on security watch lists. The program standardized how names are matched, and added age and gender to a passenger’s profile. Under the program, the Company is required to ask for  customer names exactly as they appear on a government-issued photo ID such as a passport or driver’s license. In addition, the Company must ask customers for their gender and date of birth. The TSA has also indicated its intent to expand its use of whole body imaging machines around the United States.
 
Additional Information

The Company files annual, quarterly and current reports and other information with the SEC. These materials can be inspected and copied at the SEC's Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC's Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC's Internet site is www.sec.gov.
 

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On our website, www.rjet.com/investor_relations.aspx, we provide free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as reasonably practicable after they have been electronically filed or furnished to the SEC. The code of ethics, adopted by our Board of Directors, which applies to all our employees, can also be found on our website, www.rjet.com/investorrelations.html. The charters for our audit committee, compensation committee and nominating and governance committee are also available on our website.


ITEM 1A. RISK FACTORS
 
The following risk factors, in addition to the information discussed elsewhere herein, should be carefully considered in evaluating us and our business:

Risks Related To Our Operations

Our fixed-fee business is dependent on our code-share relationships with our Partners.

We depend on relationships created by our regional jet fixed-fee code-share agreements with Delta, United and US Airways/American for all of our fixed-fee service revenues. Any material modification to, or termination of, our code-share agreements with any of these Partners could have a material adverse effect on our financial condition, results of our operations and the price of our common stock. Each of the code-share agreements contains a number of grounds for termination by our Partners, including our failure to meet specified performance levels.

In addition, because substantially all of our fixed-fee service revenues are currently generated under the fixed-fee code-share agreements, if any one of them is terminated, we cannot assure you that we would be able to enter into substitute code-share arrangements, or that any such substitute arrangements would be as favorable to us as the current code-share agreements.

We may experience difficulty finding, training and retaining qualified pilots and maintenance technicians.

The regional airline industry is experiencing a shortage of qualified personnel, specifically pilots and maintenance technicians. In addition, as is common within the regional airline industry, we have, from time to time, faced considerable turnover of our employees. Our pilots, flight attendants and maintenance technicians sometimes leave to work for mainline airlines, which generally offer higher salaries and more extensive benefit programs than regional airlines are financially able to offer. Should the turnover of employees, particularly pilots and maintenance technicians, sharply increase, we may not be able to hire sufficient pilots and maintenance technicians to replace those leaving, and in any event our training costs would likely significantly increase.

On August 1, 2013, the Congressionally mandated pilot experience qualifications contained in the Airline Safety and FAA Extension Act of 2010 became effective.  As a result of this legislation, the age and training requirements for our first officer pilots generally increased to 23 years and 1,500 hours of flight time. Military-trained pilots are subject to somewhat lower standards, but as the wind down of the U.S. involvement in conflicts in Iraq and Afghanistan has substantially concluded, there are fewer military-trained pilots currently entering the workforce. We believe that this factor, combined with the heightened requirements for non-military-trained pilots, has resulted in a growing scarcity of new entrant pilots who meet the new experience qualifications, making it difficult for us and other regional airlines to hire qualified candidates, which may lead to disruptions to service to smaller communities, higher labor costs, reduced revenue due to loss of incentive payments and/or penalties under our CPAs and potential early termination of CPAs.

In early February 2014, the Company announced it could not extend its CPAs with American Airlines and United Airlines (notwithstanding that American Airlines and United Airlines expressed an interest in negotiating an extension) for 27 E140/145 aircraft, due to the inability to recruit a sufficient number of qualified pilots to staff the Company's 2014 expected level of operations. In addition, we have had discussions with some of our Partners regarding the impact of this pilot shortage on our ability to fly their proposed flight schedules. Our Partners have certain rights and remedies under the CPAs if we fail to meet the required performance levels under those agreements, including under certain circumstances the right to terminate the agreements and/or seek significant damages from us. Any continued inability to recruit, train and retain qualified pilots and maintenance technicians may materially impact our financial condition, results of operations and the price of our common stock, including our ability to meet the contractual operational performance obligations within our fixed-fee agreements.

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Any labor disruption or labor strikes by our employees or those of our Partners would adversely affect our ability to conduct our business.

All of our pilots, flight attendants, and dispatchers are represented by unions. Collectively, these employees represent approximately 71% of our workforce. Although we have never had a work interruption or stoppage, we are subject to risks of work interruption or stoppage and/or may incur additional administrative expenses associated with union representation of our employees. If we are unable to reach agreement with any of our unionized work groups on the amended terms of their collective bargaining agreements, we may be subject to work interruptions and/or stoppages. Any sustained work stoppages could adversely affect our ability to fulfill our obligations under our code-share agreements and could have a material adverse effect on our financial condition, results of operations and the price of our common stock.

In addition, a labor disruption other than a union authorized strike may materially impact our results of operations and could cause us to be unable to meet contractual performance provisions of our capacity purchase agreements. Our Partners have certain rights and remedies under the capacity purchase agreements if we fail to meet the required performance levels, including under certain circumstances the right to terminate the agreements and/or seek significant damages from us.

The Company is currently in a labor dispute with the International Brotherhood of Teamsters ("IBT") Local 357, which represents all of our pilots.  On April 4, 2014, the Company announced that members of the IBT Local 357 failed to ratify a proposed four-year pilot labor agreement, which would have increased pay, improved work rules and allotted a significant signing bonus to our pilots.  Our inability to pay our pilots, especially our new hire first officers, market level wages is negatively impacting our ability to hire qualified pilots and operate the number of aircraft our Partners desire for us to fly under fixed-fee agreements.  In 2014, we did not renew agreements to operate 27 Embraer Regional Jet ("ERJ") aircraft and permanently parked 15 E140 aircraft, temporarily parked 12 E145 aircraft and temporarily parked an operational spare. The Company may need to park additional ERJ aircraft in 2015 and 2016 as a result of the current labor dispute, which could cause us to fail to meet the required performance levels under our CPAs.

Increases in our labor costs, which constitute a substantial portion of our total operating costs, will directly impact our earnings and our ability to compete for new fixed-fee business.

Labor costs constitute a significant percentage of our total operating costs, and we have experienced pressure to increase wages and benefits for our employees. Under our code-share agreements, our reimbursement rates contemplate labor costs that increase on a set schedule generally tied to an increase in the consumer price index or the actual increase in the contract. We are entirely responsible for our labor costs, and we may not be entitled to receive increased payments for our flights from our Partners if our labor costs increase above the assumed costs included in the reimbursement rates. As a result, a significant increase in our labor costs above the levels assumed in our reimbursement rates could result in a material reduction in our earnings.

We have collective bargaining agreements with our pilots, flight attendants, and dispatchers. We cannot assure that future agreements with our employees' unions will be on terms in line with our expectations or comparable to agreements entered into by our competitors, and any future agreements may increase our labor costs and reduce both our income and our competitiveness for future business opportunities. As of December 31, 2014, approximately 71% of the Company's workforce is employed under union contracts. Because of the high level of unionization among our employees, we are subject to risks of work interruption or stoppage and/or the incurrence of additional expenses associated with union representation of our employees.  

We may be unable to mitigate the cost of 50-seat aircraft expiring from fixed-fee agreements.

As of December 31, 2014, we have 41 50-seat regional jets operating under fixed-fee code-share agreements which are scheduled to expire between August 2015 and May 2016. In most cases, the term of the aircraft lease or debt agreement exceeds the term of the aircraft under its respective code-share agreement. To the extent that aircraft are removed from service, we must either sell or sublease the aircraft to another party in order to cover our carrying expenses for that aircraft. Our inability to sell or sublease aircraft that are removed from fixed-fee service could have a material adverse effect on our financial condition, results of operations and the price of our common stock.

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Reduced utilization levels of our aircraft under the fixed-fee agreements would adversely impact our revenues, earnings and liquidity.

Our agreements with our Partners require each of them to schedule our aircraft to a minimum level of utilization. However, the aircraft have historically been utilized more than the minimum requirement. Even though the fixed-fee rates may adjust, either up or down, based on scheduled utilization levels or require a fixed amount per day to compensate us for our fixed costs, if our aircraft are at or below the minimum requirement (including taking into account the stage length and frequency of our scheduled flights) we will likely lose both the opportunity to recover a margin on the variable costs of flights that would have been flown if our aircraft were more fully utilized and the opportunity to earn incentive compensation on such flights.

Our maintenance expenses will increase as our fleet ages and may be higher than we anticipate.

The average age of our primary fleet of E170/175 aircraft is approximately 6.4 years old. Our aircraft require less maintenance now than they will in the future. We have incurred lower maintenance expenses because most of the parts on our aircraft are under multi-year warranties. Our maintenance costs will increase as these warranties expire and our fleet ages. For example, our recent engine expenses for our E170/175 aircraft do not reflect the full mature cost of maintaining the aircraft as they do not include any expenses for LLPs.  As the Company incurs expense to replace these LLPs, only a portion of our expense may be passed through to our partners, thus our future results of operations and liquidity will be materially impacted.

We bear the cost of all routine and major maintenance on our owned and leased aircraft. Maintenance expenses comprise a significant portion of our operating expenses. In addition, we are required periodically to take aircraft out of service for heavy maintenance checks, which can increase costs and reduce revenue. We also may be required to comply with regulations and airworthiness directives the FAA issues, the cost of which our aircraft lessors may only partially assume depending upon the magnitude of the expense. Although we believe that our owned and leased aircraft are currently in compliance with all FAA issued airworthiness directives, additional airworthiness directives likely will be required in the future, necessitating additional expense.

If the financial strength of any of our Partners decreases, our financial strength is at risk.

We are directly affected by the financial and operating strength of the Partners. In the event of a decrease in the financial or operational strength of any of our Partners, such Partner may be unable to make the payments due to us under its code-share agreement. In addition, it may reduce utilization of our aircraft to the minimum levels specified in the code-share agreements, and it is possible that any code-share agreement with a code-share Partner that files for reorganization under Chapter 11 of the U.S. Bankruptcy Code may not be assumed in bankruptcy and could be modified or terminated. Any such event could have an adverse effect on our operations and the price of our common stock. As of January 27, 2015, Standard & Poor's and Moody's, respectively, maintained ratings of B+ and Ba1 for US Airways, B+ and Baa1 for American Airlines Inc., BB and Ba3 for Delta, and B and B1 for United Continental Holdings, Inc., the parent of United and Continental.

Our Partners may choose to operate regional aircraft under a wholly owned subsidiary, thus limiting the expansion of our relationships with them.

We depend on major airlines, such as our Partners, to contract with us instead of purchasing and operating their own aircraft; however, some major airlines own their own regional airlines and operate their own aircraft instead of entering into contracts with us or other independent regional carriers. For example, Delta and US Airways/American have acquired many aircraft which they fly under their affiliated carriers. We have no guarantee that in the future our Partners will choose to enter into contracts with us instead of purchasing their own aircraft or entering into relationships with competing regional airlines, as they are not prohibited from doing so under our code-share agreements. A decision by US Airways/American, Delta or United to phase out our contract-based code-share relationships as they expire and instead acquire and operate their own aircraft or to enter into similar agreements with one or more of our competitors could have a material adverse effect on our financial condition, results of operations and the price of our common stock.

Our Partners may be restricted in increasing the level of business that they conduct with us, thereby limiting our growth.

In general, the pilots' unions of certain major airlines have negotiated “scope clauses” in their collective bargaining agreements, known as CBAs, that restrict the number and/or size of aircraft that can be operated by the regional code-share partners of such major airlines. These CBAs limit regional airlines to flying aircraft with a maximum take-off weight (MTOW) of 86,000 pounds and a maximum passenger configuration of 76 seats. In addition, CBAs for Delta and United limit the total number of 76-seat aircraft that can be flown by a regional airline to 325 and 255, respectively. It is still unclear how the merger of American and US Airways will affect their combined scope.


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The amounts we receive under our code-share agreements may be less than the corresponding costs we incur.

Under our code-share agreements, we are compensated for certain costs we incur in providing services. With respect to costs that are defined as pass through costs, our code-share partner is obligated to pay to us the actual amount of the cost. With respect to other costs, our code-share partner is obligated to pay to us amounts based, in part, on pre-determined rates for certain costs. During the year ended December 31, 2014, approximately 16% of our costs were pass through costs and approximately 84% of our costs were reimbursable at pre-determined rates. These pre-determined rates are not based on the actual expenses we incur, and generally escalate based on a consumer price index, subject to a maximum cap. If our annual rate increases are less than our actual cost escalations or if we incur expenses that are greater than the pre-determined amounts payable by our code-share partners, our financial results will be negatively affected.

A majority of the Company's limited life parts are not under power by the hour agreements.  Once the maintenance event occurs for the limited life part, the Company records the expense for the event under the direct expense method.  However, these maintenance events are not a pass through cost under all of our fixed-fee arrangements.  Therefore, we could experience a significant amount of volatility in our results of operations and cash flow depending on the amount and timing of when these non-pass through maintenance events occur.

Our substantial aircraft indebtedness may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

We have substantial aircraft indebtedness, which could:

require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for operations and future business opportunities;

make it more difficult for us to satisfy our payment and other obligations under our indebtedness;

limit our ability to borrow additional money for working capital, capital expenditures, acquisitions or other purposes, if needed, and increase the cost of any of these borrowings; and/or

reduce our flexibility in planning for or responding to changing business and economic conditions.

We have historically needed substantial liquidity to fund the growth of our fixed-fee business.

We currently depend on Embraer and other original equipment manufacturers ("OEMs") to support our fleet of aircraft.

We rely on Embraer as the primary manufacturer of all of our regional jets and other OEMs who supply critical aircraft parts.  Our risks in relying primarily on a single manufacturer for each aircraft type include: 
 
the failure or inability of Embraer or an OEM to provide sufficient parts or related support services on a timely basis;

the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for these aircraft;

the issuance of FAA directives restricting or prohibiting the use of Embraer aircraft or requiring time-consuming inspections and maintenance; and
 
the adverse public perception of a manufacturer as a result of an accident or other adverse publicity.
 
Our operations could be materially adversely affected by the failure or inability of Embraer or an OEM to provide sufficient parts or related support services on a timely basis or by an interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for our aircraft.

Our business could be harmed if we lose the services of our key personnel.

Our business depends upon the efforts of our Chief Executive Officer, Bryan Bedford, and our other key management and operating personnel. We may have difficulty replacing management or other key personnel who leave and, therefore, the loss of the services of any of these individuals could harm our business. We maintain a “key man” life insurance policy in the amount of $5 million for Mr. Bedford, but this amount may not adequately compensate us in the event we lose his services.

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Our ability to utilize net operating loss carry-forwards may be limited.

At December 31, 2014, we had estimated federal net operating loss carry-forwards, which we refer to as NOLs, of $1.3 billion for federal income tax purposes that begin to expire in 2015. We have recorded a valuation allowance for $398.0 million of those NOLs. Section 382 of the Internal Revenue Code, imposes limitations on a corporation's ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of our NOLs would be subject to an annual limitation under Section 382. Any unused NOLs in excess of the annual limitation may be carried over to later years.

The imposition of a limitation on our ability to use our NOLs to offset future taxable income could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause such NOLs to expire unused, reducing or eliminating the benefit of such NOLs. Based on analysis that we performed, we believe we have not experienced a change in ownership as defined by Section 382; however; certain of our NOLs generated prior to July 2005 and acquired from previous business acquisitions are subject to an annual limitation under Section 382.

We are at risk of losses stemming from an accident involving any of our aircraft.

While we have never had a crash causing death or serious injury in over 40 years of operations, it is possible that one or more of our aircraft may crash or be involved in an accident in the future, causing death or serious injury to individual air travelers and our employees and destroying the aircraft and the property of third parties.

In addition, if one of our aircraft were to crash or be involved in an accident, we would be exposed to significant tort liability. Such liability could include liability arising from the claims of passengers or their estates seeking to recover damages for death or injury. There can be no assurance that the insurance we carry to cover such damages will be adequate. Accidents could also result in unforeseen mechanical and maintenance costs. In addition, any accident involving an aircraft that we operate could create a public perception that our aircraft are not safe, which could result in air travelers being reluctant to fly on our aircraft and a decrease in revenues. Such a decrease could materially adversely affect our financial condition, results of operations
and the price of our common stock.

We are increasingly dependent on technology, and if our technology fails or we are unable to continue to invest in new technology, our business may be adversely affected.

We have become increasingly dependent on technology initiatives to reduce costs and compete in the current business environment. The performance and reliability of our technology are critical to our ability to compete effectively. Technology initiatives will continue to require significant capital investments in order to deliver these expected benefits. If we are unable to make these investments or the expected benefit does not materialize, our business and operations could be negatively affected.

In addition, any internal technological error or failure or large scale external interruption in the technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our internal network. Any individual, sustained or repeated failure of technology could impact our customer service and result in increased costs. Like most companies, our technology systems and related data may be vulnerable to a variety of sources of interruption due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues. While we have in place, and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly to prevent a business disruption and mitigate the resulting adverse financial consequences.

Risks Associated with the Airline Industry

If passengers perceive the operations of regional aircraft as being unsafe, our business may be harmed.

In February 2009, Colgan Flight 3407, operating as Continental Connection, crashed on its approach into Buffalo, New York. A total of 50 people were killed. Since the date of this tragedy, there have been numerous press reports questioning some of the operating policies of regional airlines. In response, there have also been legislative initiatives aimed at heightening safety requirements, such as The Airline Safety and Pilot Training Improvement Act of 2009. Although our regional jets have never had a crash causing death or serious injury in over 40 years of operations, should the public perceive regional aircraft as less safe making our Partners less inclined to renew our contracts in the future, or should new legislation impose additional burdens on us, our financial condition, results of operations and the price of our common stock could be materially adversely affected.



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The airline industry has been subject to a number of strikes, which could affect our business.

The airline industry has been negatively impacted by a number of labor strikes. Any new collective bargaining agreement entered into by other carriers may result in higher industry wages and increase pressure on us to increase the wages and benefits of our employees. Furthermore, since each of our Partners is a significant source of our operating revenues, any labor disruption or labor strike by the employees of any one of our Partners could have a material adverse effect on our financial condition, results of operations and the price of our common stock.
    
Airlines are often affected by certain factors beyond their control, including economic conditions and weather events, which can affect their operations.

Generally, revenues for airlines depend on the number of passengers carried, the fare paid by each passenger and service factors, such as the timeliness of departure and arrival. Demand for air travel could weaken in an economic recession. Economic weakness in the United States and international economies could have a significant negative impact on our results of operations. During periods of fog, ice, low temperatures, storms or other adverse weather conditions, flights may be canceled or significantly delayed. For example, in the first two months of 2014, the Company canceled approximately 12% of its scheduled flights due to extreme weather, which had a negative impact to pre-tax earnings of roughly $7.0 million for the first quarter. Under our fixed-fee code-share agreements, our regional airline business is partially protected against cancellations due to weather or air traffic control, although these factors may affect our ability to receive incentive payments for flying more than the minimum number of flights specified in our code-share agreements.

The airline industry is heavily regulated.

Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs. In the last several years, the FAA has issued a number of directives and other regulations relating to the maintenance and operation of aircraft that have required us to make significant expenditures. FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne wind shear avoidance systems, noise abatement, commuter aircraft safety and increased inspection and maintenance procedures to be conducted on older aircraft.

We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. We cannot predict whether we will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not significantly increase our costs of doing business.

The FAA has the authority to issue mandatory orders relating to, among other things, pilot rest rules, the grounding of aircraft, inspection of aircraft, installation of new safety-related items and removal, replacement or modification of aircraft parts that have failed or may fail in the future. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of our Embraer or Bombardier aircraft, for any reason, could negatively impact our results of operations.

In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect our operations. From time to time, various airports throughout the country have considered limiting the use of smaller aircraft, such as Embraer or Bombardier aircraft, at such airports. The imposition of any limits on the use of Embraer or Bombardier aircraft at any airport at which we operate could interfere with our obligations under our code-share agreements and severely interrupt our business operations.

Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce revenues. For instance, “passenger bill of rights” legislation was introduced in Congress that, if enacted, would have, among other things, required the payment of compensation to passengers as a result of certain delays and limited the ability of carriers to prohibit or restrict usage of certain tickets. This legislation is not currently active, but if it is reintroduced, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs. Several state legislatures have also considered such legislation, and the State of New York in fact implemented a “passenger bill of rights” that was overturned by a federal appeals court in 2008. The DOT has imposed restrictions on the ownership and transfer of airline routes and takeoff and landing slots at certain high-density airports, including New York LaGuardia and Reagan National. In addition, as a result of the terrorist attacks in New York and Washington, D.C. in September 2001, the FAA and the TSA have imposed stringent security requirements on airlines. We cannot predict what other new regulations may be imposed on airlines and we cannot assure you that laws or regulations enacted in the future will not materially adversely affect our financial condition, results of operations and the price of our common stock.

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The airline industry is highly competitive.

Within the airline industry, we not only compete with other regional airlines, some of which are owned by or operated as partners of major airlines, but we also face competition from low-fare airlines and major airlines on many of our routes, including carriers that fly point to point instead of to or through a hub.
 
In addition, some of our competitors are larger and have significantly greater financial and other resources than we do. Moreover, federal deregulation of the industry allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats.

In addition to traditional competition among airlines, the industry faces competition from video teleconferencing and other methods of electronic communication. New advances in technology may add a new dimension of competition to the industry as business travelers seek lower-cost substitutes for air travel.


Risks Related To Our Common Stock

Our stock price is volatile.

Since our common stock began trading on The NASDAQ National Market (now the NASDAQ Global Select Market) on May 27, 2004, the market price of our common stock has ranged from a low of $2.53 to a high of $23.88 per share.  The market price of our common stock may continue to fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
 
announcements concerning our Partners, competitors, the airline industry or the economy in general;
 
strategic actions by us, our Partners or our competitors, such as acquisitions or restructurings;
 
the results of our operations;
 
media reports and publications about the safety of our aircraft or the aircraft types we operate;
 
new regulatory pronouncements and changes in regulatory guidelines;
 
general and industry specific economic conditions, including the price of oil;
 
changes in financial estimates or recommendations by securities analysts;
 
sales of our common stock or other actions by investors with significant shareholdings; and
 
general market conditions.
 
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies.  These broad market fluctuations may adversely affect the trading price of our common stock.

In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities.  Any similar litigation against us could result in substantial costs, divert management’s attention and resources, and harm our business.

Future sales of our common stock by our stockholders or insiders could depress the price of our common stock.

Sales of a large number of shares of our common stock or the availability of a large number of shares for sale could adversely affect the market price of our common stock. Sales of shares by insiders could be perceived negatively by the investment community.



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Our incorporation documents and Delaware law have provisions that could delay or prevent a change in control of our company, which could negatively affect your investment.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could delay or prevent a change in control of the Company that stockholders may consider favorable.  Certain of these provisions:

authorize the issuance of up to 5,000,000 shares of preferred stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of our common stock;
 
limit the persons who can call special stockholder meetings;
 
provide that a supermajority vote of our stockholders is required to amend certain provisions of our certificate of incorporation; and
 
establish advance notice requirements to nominate directors for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings.
 
These and other provisions in our incorporation documents and Delaware law could allow our board of directors to affect your rights as a stockholder by making it more difficult for stockholders to replace board members.  Because our board of directors is responsible for appointing members of our management team, these provisions could in turn affect any attempt to replace the current management team.  In addition, these provisions could deprive our stockholders of opportunities to realize a premium on the shares of common stock owned by them.

Our charter documents include provisions limiting voting by foreign owners.

Our certificate of incorporation provides that shares of capital stock may not be voted by or at the direction of persons who are not citizens of the United States if the number of such shares would exceed applicable foreign ownership restrictions. U.S. law currently requires that no more than 25% of the voting stock of our company or any other domestic airline may be owned directly or indirectly by persons who are not citizens of the United States. However, up to 49% of the total equity of our company or any other domestic airline may be owned directly or indirectly by persons who are not citizens of the United States.




21




ITEM 1B. UNRESOLVED STAFF COMMENTS

None

22



ITEM 2. PROPERTIES
 
Flight Equipment
 
As of December 31, 2014, we operated 244 aircraft as described in the following table:
Type
 
Total
Aircraft
 
Owned
 
Leased
 
Average Age
(in years)
 
Seats in
Current
Configuration
E145LR
 
41

 
18

 
23

 
12.3
 
50

E170/175LR
 
167

 
144

 
23

 
6.4
 
69-80

E190LR
 
5

 
2

 
3

 
4.4
 
99

Q400
 
31

 
4

 
27

 
5.6
 
71

 
 
 
 
 
 
 
 
 
 
 
Total
 
244

 
168

 
76

 
 
 
 

In addition to the aircraft listed above, we have parked 15 E140 aircraft and 13 E145 aircraft, we have leased eight E145 aircraft, three E170 aircraft and three E190 aircraft to a foreign airline, and we have leased one E135 aircraft and three E145 aircraft to domestic airlines as of December 31, 2014.

All of our leased aircraft are leased by us pursuant to operating leases, with current lease expirations ranging from 2015 to 2023. We have fixed-price purchase options under most of these leases after nine to fourteen years of the lease term. Furthermore, we have options to renew most of the leases for an additional three to four years, or purchase the leased aircraft at the conclusion of their current lease terms at fair market value.

Ground Operations and Properties

As of December 31, 2014, our facilities are summarized in the following table:
Facility
 
Square Feet
 
Location
Corporate Headquarters
 
89,000
 
Indianapolis, IN
Training Facility
 
20,400
 
Plainfield, IN
Maintenance Hangar
 
113,200
 
Indianapolis, IN
Maintenance Hangar/Office
 
236,334
 
Columbus, OH
Maintenance Hangar
 
73,500
 
Louisville, KY
Maintenance Hangar/Office
 
135,518
 
Pittsburgh, PA
Maintenance Hangar
 
98,600
 
Kansas City, MO
Maintenance Hangars
 
194,300
 
Milwaukee, WI
 
Our employees perform substantially all routine airframe and engine maintenance and periodic inspection of equipment. Our Partners or third parties provide ground support services and ticket handling services in all cities we serve our Partners.
 
We lease all of our facilities. All leased facilities are subject to either long-term leases or on a month-to-month basis.
    
We believe that our current facilities, along with our planned additional facilities, are adequate for the current and for needs of our business. 


23





ITEM 3. LEGAL PROCEEDINGS
 
The Company is subject to certain legal and administrative actions, which management considers routine to its business activities. As of December 31, 2014, management believes, after consultation with legal counsel, the ultimate outcome of any pending legal matters will not have a material adverse effect on the Company's financial position, liquidity or results of operations.





24






ITEM 4. Mine Safety Disclosures

Not Applicable.

25




PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Price
 
Our common stock is traded on the NASDAQ Global Select Market under the symbol "RJET." The following table sets forth the high and low sales prices of our common stock for the periods indicated.
 
Year Ended December 31, 2013
High
 
Low
First Quarter
$
11.95

 
$
6.05

Second Quarter
11.82

 
9.44

Third Quarter
13.92

 
10.81

Fourth Quarter
12.68

 
9.17

Year Ended December 31, 2014
 

 
 

First Quarter
$
11.80

 
$
8.56

Second Quarter
11.24

 
7.82

Third Quarter
12.03

 
9.49

Fourth Quarter
14.74

 
10.05

 
As of December 31, 2014 there were 10,334 stockholders of record of our common stock. We have never paid cash dividends on our common stock. The payment of future dividends is within the discretion of our board of directors and will depend upon our future earnings, our capital requirements, bank or other lender financing, financial condition and other relevant factors.




26




Performance Graph 
The above graph compares the performance of the Company from December 31, 2009 through December 31, 2014, against the performance of (i) the Composite Index for NASDAQ Stock Market (U.S. Companies) and (ii) an index of companies engaged in air transportation (SIC 4512), including regional airlines, whose stocks trade on the NASDAQ, for the same period.
 
Below is a summary of certain information with respect to the equity compensation plans of the Company as of December 31, 2014:
 
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
Equity compensation plans approved by security holders
 
 
 
 
 
 
Options outstanding under the 2002 Equity Incentive Plan (1)
 
526,963

 
$
16.55

 

Options outstanding under the 2007 Equity Incentive Plan (2)
 
2,608,542

 
13.78

 
2,596,474

Equity compensation plans not approved by security holders
 

 

 

Total
 
3,135,505

 
$
14.25

 
2,596,474


(1) The 2002 Equity Incentive Plan expired on April 19, 2012 with 22,434 shares available to be issued. There are no shares available for future issuance as of December 31, 2014.

(2) On September 17, 2013, the Company's stockholders approved an amended and restated plan providing for 3.5 million additional shares, increasing the total shares issuable under the 2007 Equity Incentive Plan, including shares previously issued, to 8.5 million.

Unregistered Sales of Equity Securities

None


27



ITEM 6. SELECTED FINANCIAL DATA
 
The following selected financial data and operating statistics should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(in millions, except per share amounts)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Fixed-fee service
$
1,348.5

 
$
1,276.1

 
$
1,102.1

 
$
1,079.0

 
$
1,231.8

Passenger service

 
46.3

 
247.9

 
388.9

 

Other
26.9

 
24.1

 
27.4

 
46.5

 
27.2

 
 
 
 
 
 
 
 
 
 
Total operating revenues    
1,375.4

 
1,346.5

 
1,377.4

 
1,514.4

 
1,259.0

Operating expenses:
 
 
 

 
 

 
 

 
 

Wages and benefits    
368.0

 
342.1

 
308.4

 
297.1

 
290.3

Aircraft fuel (2)
22.4

 
44.9

 
161.4

 
303.4

 
68.0

Landing fees and airport rents (1)
26.9

 
46.4

 
61.5

 
64.9

 
51.8

Aircraft and engine rent    
126.0

 
122.6

 
110.7

 
117.0

 
128.9

Maintenance and repair    
251.1

 
251.6

 
235.3

 
237.2

 
205.8

Insurance and taxes    
19.9

 
25.1

 
24.7

 
26.2

 
28.0

Depreciation and amortization   
173.0

 
150.7

 
160.0

 
162.9

 
161.3

Promotion and sales

 
2.3

 
12.8

 
21.2

 

Impairment and other charges (3)
53.4

 
21.2

 

 
191.1

 

Other
149.2

 
148.6

 
134.1

 
116.7

 
113.6

 
 
 
 
 
 
 
 
 
 
Total operating expenses
1,189.9

 
1,155.5

 
1,208.9

 
1,537.7

 
1,047.7

 
 
 
 
 
 
 
 
 
 
Operating income (loss)
185.5

 
191.0

 
168.5

 
(23.3
)
 
211.3

Other income (expense):
 
 
 

 
 

 
 

 
 

Interest expense
(119.7
)
 
(112.2
)
 
(117.6
)
 
(126.0
)
 
(137.9
)
Fair value gain - restructuring asset (3)
18.4

 

 

 

 

Other - net
1.0

 
2.5

 
0.2

 
0.2

 
3.4

Total other expense
(100.3
)
 
(109.7
)
 
(117.4
)
 
(125.8
)
 
(134.5
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
85.2

 
81.3

 
51.1

 
(149.1
)
 
76.8

 
 
 
 
 
 
 
 
 
 
Income tax expense (benefit) (4)
20.9

 
33.0

 
19.8

 
(55.8
)
 
29.2

 
 
 
 
 
 
 
 
 
 
Net income (loss) of the Company from continuing operations

64.3

 
48.3

 
31.3

 
(93.3
)
 
47.6

 
 
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations, net of tax

 
(21.6
)
 
20.0

 
(58.5
)
 
(61.4
)
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
64.3

 
$
26.7

 
$
51.3

 
$
(151.8
)
 
$
(13.8
)
 
 
 
 
 
 
 
 
 
 

28



Income (loss) per share basic:
 
 
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
1.29

 
$
0.98

 
$
0.65

 
$
(1.94
)
 
$
1.32

Discontinued operations, net of tax

 
(0.44
)
 
0.41

 
(1.20
)
 
(1.70
)
Net income (loss) per share basic
$
1.29

 
$
0.54

 
$
1.06

 
$
(3.14
)
 
$
(0.38
)
 
 
 
 
 
 
 
 
 
 
Income (loss) per share diluted:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
1.24

 
$
0.92

 
$
0.63

 
$
(1.94
)
 
$
1.25

Discontinued operations, net of tax

 
(0.40
)
 
0.39

 
(1.20
)
 
(1.63
)
Net income (loss) per share diluted
$
1.24

 
$
0.52

 
$
1.02

 
$
(3.14
)
 
$
(0.38
)
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 

 
 

 
 

 
 

Basic    
49.8

 
49.2

 
48.5

 
48.2

 
36.0

Diluted    
52.4

 
54.6

 
51.4

 
48.2

 
38.0

 
(1) The decrease in landing fees in 2013 and 2014 was primarily attributable to United paying the fees directly beginning June, 2013.

(2) The increase in 2011 and 2012 in fuel expense compared to 2010, was primarily attributable to flying under the pro-rate operations with Frontier. The increase in 2012 was partially offset by a decrease in pass through costs, as all of our partners, as of December 31, 2012, are providing fuel for our aircraft under capacity purchase agreements. The decrease in 2013 and 2014 was related to a reduction of pro-rate operations with Frontier.

(3) See note 3 of the Consolidated Financial Statements for further discussion.

(4) The decrease in tax expense in 2014 was primarily attributable to the Company releasing valuation allowances for state NOL's resulting in a $4.8 million in tax benefit. In addition, the Company's effective state tax rate decreased, which resulted in $4.2 million in tax benefit.

 
Years Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Airline Operating Data:
 
 
 
 
 

 
 

 
 

Block hours
763,011

 
749,931

 
701,040

 
731,440

 
740,489

Departures
425,596

 
440,255

 
409,058

 
429,564

 
440,452

Passengers carried (millions)
22.6

 
21.5

 
20.1

 
20.8

 
21.9

Revenue passenger miles (millions) (1)
11,494

 
10,290

 
10,120

 
10,691

 
11,534

Available seat miles (millions)(2)
14,651

 
13,486

 
13,437

 
14,449

 
15,054

Passenger load factor (3)
78.5
%
 
76.3
%
 
75.3
%
 
74.0
%
 
76.6
%
Average passenger trip length (miles)
498

 
472

 
490

 
498

 
527

Number of aircraft in operations (end of period):
 
 
 

 
 

 
 

 
 

Regional Jets:
 
 
 

 
 

 
 

 
 

Owned    
164

 
164

 
146

 
152

 
150

Leased    
49

 
63

 
63

 
67

 
72

Q400:
 
 
 
 
 

 
 
 
 

Owned    
4

 
4

 
4

 
2

 
3

Leased    
27

 
27

 
13

 

 

Total aircraft
244

 
258

 
226

 
221

 
225


(1) Passengers carried multiplied by miles flown.
(2) Passenger seats available multiplied by miles flown.
(3) Revenue passenger miles divided by available seat miles.


29



 
 
 
2014
 
2013
 
2012
 
2011
 
2010
Consolidated Balance Sheet Data:
(in millions)
Cash and cash equivalents
$
223.9

 
$
276.7

 
$
210.8

 
$
174.5

 
$
110.3

Aircraft and other equipment—net
2,860.9

 
2,563.6

 
2,311.2

 
2,564.3

 
2,861.9

Total assets
3,494.0

 
3,271.3

 
3,655.2

 
3,901.7

 
4,348.7

Long-term debt, including current maturities
2,339.2

 
2,166.8

 
1,972.7

 
2,194.4

 
2,349.6

Total stockholders' equity
620.5

 
550.7

 
513.5

 
460.5

 
609.6

 




30



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We are a Delaware holding company organized in 1996 that offers scheduled passenger services through our wholly-owned operating air carrier subsidiaries: Chautauqua Airlines, Inc. (“Chautauqua”) through December 31, 2014, Shuttle America Corporation (“Shuttle”) and Republic Airline Inc. (“Republic Airline”). Unless the context indicates otherwise, the terms the “Company,” “we,” “us,” or “our,” refer to Republic Airways Holdings Inc. and our subsidiaries.

As of December 31, 2014, our operating subsidiaries offered scheduled passenger service on 1,229 flights daily to 101 cities in 38 states and Canada under scheduled passenger service through our fixed-fee code-share agreements with United Continental Holdings, Inc. ("United"), Delta Air Lines, Inc. ("Delta"), and US Airways/American Airlines Group, Inc. ("American") (collectively referred to as our "Partners"). Currently, we provide our Partners with fixed-fee regional airline services, operating as Delta Connection, United Express, or US Airways Express/American Eagle, including service out of their hubs and focus cities. The Company operated aircraft under a pro-rate agreement with Frontier Airlines, Inc. ("Frontier") which terminated during the first quarter of 2014.

The following table outlines the type of aircraft our subsidiaries operate and their respective operations within our business units as of December 31, 2014:
 
 
 
 
 
 
 Operating Subsidiaries
 
Aircraft Size (Seats)
 
United
 
Delta
 
US Airways/American
 
Charters/Spares
 
Number of Aircraft
Chautauqua
 
44 to 50
 

 
41

 

 

 
41

Shuttle
 
70 to 76
 
38

 
30

 

 

 
68

Republic Airline
 
69 to 99
 
28

 

 
99

 
8

 
135

Total number of operating aircraft
 
 
 
66

 
71

 
99

 
8

 
244


We have fixed-fee regional jet code-share agreements with each of our Partners that require us to maintain specified performance levels. Pursuant to these fixed-fee agreements, which provide for minimum aircraft utilization at fixed rates, we are authorized to use our Partners' two-character flight designation codes to identify our flights and fares in our Partners' computer reservation systems, to paint our aircraft in the style of our Partners, to use their service marks and to market ourselves as a carrier for our Partners. Our fixed-fee agreements have historically limited our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple major airlines has enabled us to reduce our dependence on any single airline, allocate our overhead more efficiently among our Partners and reduce the cost of our services to our Partners.
    
During 2014, our operational fleet decreased from 258 to 244. The company took delivery of 22 E175 aircraft, permanently parked 15 E140 aircraft, temporarily parked 13 E145 aircraft, sold two E190 aircraft and leased three E145 aircraft and three E190 aircraft. The combination of Congressionally mandated pilot experience qualifications, our inability to pay our pilots market-level wages due to the ongoing labor dispute with our pilots’ union, and other factors has continued to negatively affect our ability to hire qualified pilots to fly our aircraft and operate the number of aircraft we are required to fly under our fixed fee agreements with our Partners.   We expect that we may need to park additional aircraft in 2015 and 2016, which would negatively affect our revenues and operating results and further impair our ability to meet the required performance levels under our capacity purchase agreements.   See “Risk Factors”.

Sale of Frontier

In October 2013, the Company entered into a stock purchase agreement for the sale of Frontier to an affiliate of Indigo Partners LLC. The sale was consummated on December 3, 2013. As a result, the Company reported Frontier as discontinued operations on the consolidated statements of operations and consolidated statements of cash flows for all periods presented.

31




Certificate Consolidation

On January 1, 2015, Republic completed its consolidation of all Chautauqua Airlines operations onto the Shuttle America operating certificate. All operating aircraft and related employees are now transferred to Shuttle America's operation. Republic hopes to sell the remaining Chautauqua Airlines' entity and related assets during the first half of 2015. The consolidation is consistent with the Company's strategy to simplify its business by operating fewer fleet types on fewer certificates.

Fleet Transition
    
On September 16, 2014, the Company entered into new agreements and amended certain of their existing agreements resulting in (a) an increase of 50 E175 aircraft to be flown for United under the Company's United Express Agreement with United to be placed in service from the third quarter of 2015 to fourth quarter of 2017, (b) a corresponding increase in the number of aircraft to be purchased from Embraer S.A. (formerly known as Embraer-Empresa Brasileira de Aeronautica S.A.) ("Embraer") under the Company's Amended and Restated Purchase Agreement with Embraer, (c) the wind down of all Q400 aircraft in the Company's Capacity Purchase Agreement with United, and (d) the sublease of 24 Q400 aircraft to Flybe Limited pursuant to a Master Sublease Agreement and the return of three Q400 aircraft to the lessor in January of 2015. In January 2015, the Company finalized amendments to its agreements with United and Embraer to increase the number of E175 aircraft deliveries by five, to 55.
    
In December 2014, we completed the sale of two E190 aircraft and executed an agreement to sell three other E190 aircraft. The sale of these five aircraft will leave us with two owned E190 aircraft and three leased E190 aircraft that are expected to be removed from fixed-fee charter service in August of 2015. We expect to return the three leased aircraft to the lessor in 2015 and the remaining two aircraft are under a firm sales agreement.

Business Strategy

Develop culture that attracts and retains qualified airline professionals - Working together, we will provide the safest, most reliable and most convenient travel experience for our passengers and a positive work environment for our associates. We strive to make our Company the employer of choice for regional airline professionals, enabling us to develop mutually beneficial working relationships with our business partners.

Continue to operate a high-quality fleet of aircraft across an efficient network - We intend to maintain a modern, high-quality fleet of regional aircraft that meets or exceeds stringent industry operating standards and complies with the terms of our fixed-fee regional aircraft code-share agreements. Our operations are concentrated in the Northeast and Midwest and we staff our crew and maintenance bases to leverage our resources across our network. See route map on page 6.

Continue to provide efficient and effective solutions to our Partners - We have strong, long-term relationships with each of our Partners and have historically worked together with them to meet their operational and network needs. Historically, we have provided safe, reliable, and cost-efficient solutions for our Partners. We remain focused on anticipating and continuing to assist our Partners with their business strategies.

Continue to simplify our operating fleet by operating only larger regional jets - Network carrier consolidation, along with historically high fuel prices, has limited the economic use of smaller regional jets. The Company is actively seeking opportunities to transition out of its 50-seat operational fleet with the ultimate objective to operate a single fleet type.

Recent Developments

During the fourth quarter of 2014, Republic extended the service terms under its fixed-fee capacity purchase agreements with respect to 28 E170/175 aircraft for US Airways, Inc. and 30 E170/175 aircraft for Delta Air Lines, Inc. In addition, we agreed to operate an additional nine aircraft for Delta Air Lines, Inc.  The extended terms on these aircraft align more closely with the maturity schedule of the underlying debt obligations.  The extension of these agreements significantly reduces the Company’s exposure to uncovered financing costs of the aircraft and therefore reduces our long-term liquidity risk related to these assets.

32




Revenue
 
Fixed-Fee Service - Under our code-share arrangements with our Partners, we receive fixed fees, as well as reimbursement of specified costs on a gross basis with additional possible incentives from our Partners for superior performance. For the years ended December 31, 2014, 2013 and 2012, substantially all of our fixed-fee revenue was earned under our fixed-fee arrangements. The number of aircraft we operate and aircraft utilization are the most significant drivers of our revenue, as opposed to the number of passengers we carry or the fare the passengers pay.

Other Revenue - Other revenue primarily consists of revenue related to lease revenue for aircraft leased under operating leases.

Operating Expenses

A brief description of the items included in our operating expenses line items follows.

Wages and Benefits
 
This expense includes not only wages and salaries, but also expenses associated with various employee benefit plans, employee incentives, stock compensation, and payroll taxes. These expenses will fluctuate based primarily on our level of operations, changes in wage rates for contract, and non-contract employees and changes in costs of our benefit plans.
 
Aircraft Fuel
 
As of December 31, 2014, all of our aircraft fuel for operations is supplied directly by our code-share partners, and thus, we do not record expense or the related revenue for those gallons of fuel.  Beginning in July 2012, we did not record fuel expense and the related revenue for the United operations.  We also did not pay for or record fuel expense and the related revenue for US Airways/American or Delta operations.   All fuel costs including into-plane fees and taxes are expensed as incurred for our pro-rate and fixed-fee charter operations. 

Landing Fees and Airport Rents
 
This expense consists primarily of aircraft landing fees and airport rental fees. Under our fixed-fee agreements, we are generally reimbursed for the actual costs of landing fees.  Airport rents consist primarily of cost related to our scheduled charter operation, which are reimbursed as pass through costs.

Aircraft and Engine Rent
 
This expense consists of the costs of leasing aircraft and spare engines. The leased aircraft and spare engines are operated under long-term operating leases with third parties. Aircraft rent is reduced by the amortization of deferred credits received from the aircraft manufacturer for parts and training. The credits are deferred and amortized on a straight-line basis over the term of the respective lease of the aircraft.

Maintenance and Repair
 
Maintenance and repair expenses include all parts, materials, tooling and spares required to maintain our aircraft. We have entered into long-term maintenance "power-by-the-hour" service contracts with third-party maintenance providers under which we are charged fixed rates for each flight hour or departure accumulated by the majority of our engines and some of the major airframe components. The effect of such contracts is to reduce the volatility of aircraft maintenance expense over the term of the contract.  All other maintenance is expensed as incurred under the direct expense method of accounting.
 
Insurance and Taxes
 
This expense includes the costs of passenger liability insurance, aircraft hull insurance, war risk insurance and all other insurance policies, other than employee welfare insurance. Additionally, this expense includes personal and real property taxes, including aircraft property taxes. Under our current fixed-fee agreements, we are reimbursed for the actual costs of passenger liability insurance, war risk insurance, aircraft hull insurance and property taxes, subject to certain restrictions. Under our US Airways and United fixed-fee agreements, we are reimbursed for the actual costs of such items other than aircraft hull insurance, which is reimbursed at agreed upon rates.
 

33



Depreciation and Amortization
 
This expense includes the depreciation of all fixed assets, including aircraft.

Impairment Charges and Other

This expense includes impairment of aircraft and other equipment, maintenance deposits and other assets and the loss on sale of aircraft.

Other
 
This expense includes the costs of crew training, crew travel, airport, passenger and ground handling related expenses, all hangar and administrative lease expenses, professional fees, and all other administrative and operational overhead expenses not included in other line items above. Additionally, if incurred, this expense will include aircraft return costs, gains and losses on disposal of other assets, reorganization costs, severance costs and bad debt expenses.
 
Results of Operations

The following tables sets forth information regarding the Company’s statistical performance for the years ended December 31, 2014 and 2013.
 
Operating Highlights
Years Ended December 31,
 
2014
 
2013
 
Change
Fixed-fee service
$
1,348.5

 
$
1,276.1

 
5.7
 %
Passenger service

 
46.3

 
(100.0
)%
Other
26.9

 
24.1

 
11.6
 %
Total revenues (millions)
$
1,375.4

 
$
1,346.5

 
2.1
 %
Total fuel expense (millions)
$
22.4

 
$
44.9

 
(50.1
)%
Operating aircraft at period end:
 
 
 
 
 
   44-50 seats7
41

 
72

 
(43.1
)%
   69-99 seats8
203

 
186

 
9.1
 %
Block hours5
763,011

 
749,931

 
1.7
 %
Departures
425,596

 
440,255

 
(3.3
)%
Passengers carried
22,576,914

 
21,498,826

 
5.0
 %
Revenue passenger miles ("RPM") (millions) 1
11,494

 
10,290

 
11.7
 %
Available seat miles ("ASM") (millions) 2
14,651

 
13,486

 
8.6
 %
Passenger load factor 3
78.5
%
 
76.3
%
 
2.2 pts

Cost per ASM, including interest expense (cents) 4
8.57

 
9.22

 
(7.0
)%
Cost per ASM, including interest expense and excluding fuel expense (cents)4
8.42

 
8.89

 
(5.3
)%
Gallons consumed
6,108,054

 
12,481,012

 
(51.1
)%
Average cost per gallon
$
3.67

 
$
3.60

 
1.9
 %
Average daily utilization of each aircraft (hours) 6
9.5

 
9.7

 
(2.1
)%
Average length of aircraft flight (miles)
498

 
472

 
5.5
 %
Average seat density
69

 
65

 
6.2
 %

1.
Revenue passenger miles are the number of scheduled miles flown by revenue passengers.

2.
Available seat miles are the number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.


34



3.
Passenger load factor is revenue passenger miles divided by available seat miles.

4.
Costs (in all periods) exclude impairments, fair value gain and other non-operating income. Total operating and interest expenses excluding other impairment charges is not a calculation based on accounting principles generally accepted in the United States of America and should not be considered as an alternative to total operating expenses. Cost per available seat mile utilizing this measurement is included as it is a measurement recognized by the investing public relative to the airline industry.

5.
Hours from takeoff to landing, including taxi time. 

6.
Average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival).

7.
Excludes 11 owned and four leased E140 aircraft that were permanently parked, four owned and nine leased E145 aircraft that were temporarily parked, and one owned E135 aircraft and 11 owned E145 aircraft that are leased to other operators, as of December 31, 2014.

8.
Excludes three owned E190 aircraft and three owned E170 aircraft that are leased to other operators, as of December 31, 2014.

The following table sets forth information regarding the Company’s revenues and expenses from continuing operations for the years ended December 31, 2014 and 2013.
 
 
Years Ended December 31
2014
 
2013
 
 $ Variance
 
% Variance
Fixed-fee service
$
1,348.5

 
$
1,276.1

 
72.4

 
5.7
 %
Passenger service

 
46.3

 
(46.3
)
 
(100.0
)%
Other
26.9

 
24.1

 
2.8

 
11.6
 %
TOTAL OPERATING REVENUES
$
1,375.4

 
$
1,346.5

 
$
28.9

 
2.1
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
   Wages and benefits
368.0

 
342.1

 
25.9

 
7.6
 %
   Aircraft fuel
22.4

 
44.9

 
(22.5
)
 
(50.1
)%
   Landing fees and airport rents
26.9

 
46.4

 
(19.5
)
 
(42.0
)%
   Aircraft and engine rent
126.0

 
122.6

 
3.4

 
2.8
 %
   Maintenance and repair
251.1

 
251.6

 
(0.5
)
 
(0.2
)%
   Insurance and taxes
19.9

 
25.1

 
(5.2
)
 
(20.7
)%
   Depreciation and amortization
173.0

 
150.7

 
22.3

 
14.8
 %
   Promotion and sales

 
2.3

 
(2.3
)
 
(100.0
)%
   Impairment and other charges
53.4

 
21.2

 
32.2

 
151.9
 %
   Other
149.2

 
148.6

 
0.6

 
0.4
 %
Total operating expenses
1,189.9

 
1,155.5

 
34.4

 
3.0
 %
OPERATING INCOME
185.5

 
191.0

 
 
 
 
Total non-operating expense, net
(100.3
)
 
(109.7
)
 
9.4

 
(8.6
)%
INCOME BEFORE INCOME TAXES
$
85.2

 
$
81.3

 
3.9

 
4.8
 %
 
 
 
 
 
 
 
 

2014 compared to 2013

Operating Revenues

Operating revenues increased by 2.1% to $1,375.4 million in 2014 compared to 2013. Fixed fee service revenue increased $72.4 million or 5.7%, to $1,348.5 million due to increased E175 flying with American Airlines, offset by the removal of a combined 27 small jets from United and American fixed-fee service. Passenger service revenue decreased $46.3 million, due to the removal of E190 aircraft operating under the pro-rate agreement with Frontier.

35




Factors relating to changes in operating expenses are discussed below:
 
The increase in wages and benefits of 7.6%, or $25.9 million, was primarily due to an increase in E175 operations, an increase in the cost of benefits we provide to our employees and new pilot flight and duty rest regulations (Federal Aviation Regulation 117).
 
The decrease in aircraft fuel expenses of 50.1%, or $22.5 million, was primarily due to a 51.1% decrease in gallons consumed because of the elimination of pro-rate operations for Frontier.

Landing fee and airport rent expenses decreased 42.0%, or $19.5 million, primarily due to United beginning to pay all landing fees in June 2013, representing $11.3 million of the total decrease, coupled with a $6.0 million decrease related to the decrease in small jet and pro-rate operations with Frontier.

Insurance and taxes decreased 20.7%, or $5.2 million, primarily due to a decrease in property tax expense, which is a pass through cost under our fixed-fee agreements, coupled with the removal of small jet aircraft from operations.
.
The increase in depreciation and amortization of 14.8%, or $22.3 million, was primarily due to the increase in the number of E175 aircraft in operation partially offset by lower depreciation costs on small jet operations.

The other impairment charges in 2014 were due to impairment and other charges on owned E140 aircraft, which were abandoned of $19.9 million, owned E190 aircraft, which are in the process of being sold, of $14.4 million, owned Q400 aircraft, which are scheduled to come out of service in the third quarter of 2016, of $13.3 million, and a loss on sale of E190 aircraft of $5.8 million. The 2013 impairment charges of $21.2 million related to owned E190 aircraft and the write-off of maintenance deposits on leased E190 aircraft.

The decrease in non-operating expenses was primarily due to the fair value gain the Company recorded for the Chautauqua restructuring asset of $18.4 million, partially offset by an increase in interest expense on new E175 aircraft.

We recorded an income tax expense of $20.9 million or 24.5% effective tax rate during 2014, compared with an income tax expense of $33.0 million or a 40.6% effective tax rate during 2013. The effective tax rate is lower than the statutory rate primarily due to the release of valuation allowances and a decrease of the effective state tax rate in 2014. The 2013 effective rate was higher than the statutory rate primarily due to miscellaneous permanent tax adjustments and an increase in valuation allowance.
  

36



The following tables set forth information regarding the Company’s statistical performance for the years ended December 31, 2013 and 2012.

Operating Highlights
Twelve Months Ended December 31,
 
2013
 
2012
 
Change
Fixed-fee service
$
1,276.1

 
$
1,102.1

 
15.8
 %
Passenger service
46.3

 
247.9

 
(81.3
)%
Other
24.1

 
27.4

 
(12.0
)%
Total revenues (millions)
$
1,346.5

 
$
1,377.4

 
(2.2
)%
Total fuel expense (millions) 1
$
44.9

 
$
161.4

 
(72.2
)%
Operating aircraft at period end:
 
 
 
 
 
   44-50 seats
72

 
71

 
1.4
 %
   69-99 seats
186

 
155

 
20.0
 %
Block hours 7
749,931

 
701,040

 
7.0
 %
Departures
440,255

 
409,058

 
7.6
 %
Passengers carried
21,498,826

 
20,112,289

 
6.9
 %
Revenue passenger miles ("RPM") (millions) 2
10,290

 
10,120

 
1.7
 %
Available seat miles ("ASM") (millions) 3
13,486

 
13,437

 
0.4
 %
Passenger load factor 4
76.3
%
 
75.3
%
 
1.0 pts

Cost per ASM, including interest expense (cents) 5 6
9.22

 
9.87

 
(6.6
)%
Cost per ASM, including interest expense and excluding fuel expense (cents) 6
8.89

 
8.67

 
2.5
 %
Gallons consumed
12,481,012

 
48,842,044

 
(74.4
)%
Average cost per gallon
$
3.60

 
$
3.30

 
9.1
 %
Average daily utilization of each aircraft (hours) 8
9.7

 
9.8

 
(1.0
)%
Average length of aircraft flight (miles)
472

 
490

 
(3.7
)%
Average seat density
65

 
67

 
(3.0
)%

1.
Includes $48.2 million of fuel expense reimbursement for the year ended December 31, 2012. Effective July 1, 2012, United agreed to supply fuel directly to our flights under its code-share agreements, and the Company will no longer recognize the cost of fuel and related revenue for fuel used under the United code-share agreement. Only fuel for pro-rate and fixed-fee charter flying is included in the fuel amount for the year ended December 31, 2013.

2.
Revenue passenger miles are the number of scheduled miles flown by revenue passengers.

3.
Available seat miles are the number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.

4.
Passenger load factor is revenue passenger miles divided by available seat miles.

5.
Total operating costs, including interest expense, divided by available seat miles.

6.
Costs (in all periods) exclude impairments and other expenses. Total operating and interest expenses excluding other impairment charges is not a calculation based on accounting principles generally accepted in the United States of America and should not be considered as an alternative to total operating expenses. Cost per available seat mile utilizing this measurement is included as it is a measurement recognized by the investing public relative to the airline industry.

7.
Hours from takeoff to landing, including taxi time. 

8.
Average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival).

37




The following table sets forth information regarding the Company’s revenues and expenses from continuing operations for the years ended December 31, 2013 and 2012.
 
 
Years Ended December 31
2013
 
2012
 
Variance
 
% Variance
Fixed-fee service
$
1,276.1

 
$
1,102.1

 
$
174.0

 
15.8
 %
Passenger service
46.3

 
247.9

 
(201.6
)
 
(81.3
)%
Other
24.1

 
27.4

 
(3.3
)
 
(12.0
)%
TOTAL OPERATING REVENUES
$
1,346.5

 
$
1,377.4

 
$
(30.9
)
 
(2.2
)%
OPERATING EXPENSES:
 
 
 
 
 
 
 
   Wages and benefits
342.1

 
308.4

 
33.7

 
10.9
 %
   Aircraft fuel
44.9

 
161.4

 
(116.5
)
 
(72.2
)%
   Landing fees and airport rents
46.4

 
61.5

 
(15.1
)
 
(24.6
)%
   Aircraft and engine rent
122.6

 
110.7

 
11.9

 
10.7
 %
   Maintenance and repair
251.6

 
235.3

 
16.3

 
6.9
 %
   Insurance and taxes
25.1

 
24.7

 
0.4

 
1.6
 %
   Depreciation and amortization
150.7

 
160.0

 
(9.3
)
 
(5.8
)%
   Promotion and sales
2.3

 
12.8

 
(10.5
)
 
(82.0
)%
   Other impairment charges
21.2

 

 
21.2

 
100.0
 %
   Other
148.6

 
134.1

 
14.5

 
10.8
 %
Total operating expenses
1,155.5

 
1,208.9

 
(53.4
)
 
(4.4
)%
OPERATING INCOME (LOSS)
191.0

 
168.5

 


 


Total non-operating expense, net
(109.7
)
 
(117.4
)
 
7.7

 
(6.6
)%
INCOME (LOSS) BEFORE INCOME TAXES
$
81.3

 
$
51.1

 
$
30.2

 
59.1
 %
 
 
 
 
 
 
 
 

2013 Compared to 2012

Operating revenues decreased by 2.2% due to a decrease in pro-rate flying for Frontier (which terminated in the first quarter of 2014), representing approximately $193 million, offset by an increase in Q400 flying with United Airlines, new fixed-fee E190 scheduled charter flying and new E175 flying with American representing approximately $190 million. Additionally, fixed-fee revenues for our small jet aircraft increased approximately $20 million, offset by a decrease in pass through revenues for fuel and landing fees of approximately $60 million, due to United paying fuel directly as of July 1, 2012 and United beginning to pay all landing fees in June 2013.

Factors relating to changes in operating expenses are discussed below:
 
The increase in wages and benefits of 10.9%, or $33.7 million, was directly related to an increase in block hours of 7% coupled with an increase in flight crew salaries and benefits costs for our additional E175 aircraft, Q400 aircraft, and scheduled charter flying.
 
The decrease in aircraft fuel expenses of 72.2%, or $116.5 million, was primarily due to a 74.4% decrease in gallons consumed because of a reduction in pro-rate flying for Frontier and United paying fuel directly as of July 1, 2012, representing a decrease of approximately $80 million and $48 million, respectively. The average price per gallon increased to $3.60, contributing $3.7 million to the overall increase in fuel costs. The decrease was offset by an increase of approximately $21 million for fuel costs related to increased charter flying in our scheduled charter programs.

Landing fee and airport rent expenses decreased 24.6%, or $15.1 million, primarily due to United beginning to pay all landing fees in June 2013, representing $9.8 million of the total decrease, coupled with the decrease in pro-rate flying for Frontier, which contributed $6.9 million to the total decrease.

Aircraft and engine rent expenses increased 10.7%, or $11.9 million, due primarily to an increase in the number of leased Q400 aircraft.

Maintenance and repair expenses increased 6.9%, or $16.3 million, primarily due to the increase in block hours of 7.0%.

38




The decrease in depreciation and amortization of 5.8%, or $9.3 million, was directly related to the restructuring of Chautauqua.

The other impairment charges in 2013 were due to an impairment charge on owned E190 aircraft and the write-off of maintenance deposits on leased E190 aircraft. The impairment charge is primarily related to the anticipated termination of pro-rate flying completed by the E190 fleet during the first quarter of 2014.

We recorded an income tax expense of $33.0 million or 40.6% effective tax rate during 2013, compared with an income tax expense of $19.8 million or 38.7% effective tax rate during 2012. The effective tax rate is higher than the statutory rate primarily due to miscellaneous permanent tax adjustments and an increase in valuation allowances in 2013. The 2012 effective tax rate was only slightly higher than the statutory rate, primarily due to miscellaneous permanent tax adjustments being offset with favorable adjustments to deferred tax assets.

Liquidity and Capital Resources

2014 compared to 2013
 
As of December 31, 2014, we had total cash of $245.6 million of which $223.9 million was unrestricted. At December 31, 2014, we had a working capital deficit of $112.0 million.  The Company currently anticipates that its unrestricted cash on hand and the cash generated from operations are sufficient to cover our capital expenditures and debt repayments. The Company has firm financing commitments to debt finance the remaining six E175 aircraft scheduled to enter service through the second quarter of 2015.

Net cash provided by operating activities of continuing operations was $320.5 million in 2014 compared to $240.6 million in 2013.  The $79.9 million increase in operating cash flows is primarily attributable to the increase in our E175 operations and timing differences in working capital in 2014 as compared to 2013.

Net cash used in investing activities of continuing operations was $553.1 million in 2014 compared to cash used in investing activities of $464.1 million in 2013, a change of $89.0 million. In 2014, the Company spent $569.2 million for 22 E175 aircraft and other equipment for the American E175 fixed-fee agreement compared to $476.0 million for 19 E175 aircraft and other equipment in 2013. In addition the Company paid $27.5 million in pre-delivery deposits in 2014 compared to $30.0 million in 2013. This was partially offset by the proceeds from the sale of two E190 aircraft and other assets of $41.3 million. In 2013, the Company had proceeds from the sale of three E190 aircraft and other assets of $46.2 million.

Net cash provided by financing activities of continuing operations was $179.8 million in 2014 compared to net cash provided by financing activities of $205.7 million in 2013. The Company made scheduled principal repayments of $271.1 million and extinguished $37.0 million of aircraft debt in 2014 compared to repayments of $205.6 million and extinguishments of $58.7 million in 2013. The Company also paid $48.7 million of cash to redeem convertible notes in 2014. The Company received proceeds from debt issuances and refinancing of $539.2 million in 2014, compared to $470.0 million of other proceeds in 2013.

Other Liquidity

The Company expects to take delivery of 55 E175 aircraft that will enter service for the United operations. During 2015, the Company expects to take delivery of the first 18 E175 aircraft for which it will make an initial cash investment of $75.0 million to $100.0 million.
    
Included in the current portion of long term debt are approximately $28.7 million of aircraft related debt obligations that the company expects to refinance during the year. A substantial portion of the Company's assets are encumbered, and the Company has a limited quantity of assets that could be used as collateral in future financings. There can be no assurance that the Company will be successful in obtaining financings at sufficient levels or on acceptable terms.

Letters of Credit

As we enter new markets, increase the amount of space we lease, or add leased aircraft, we are often required to provide the airport authorities and lessors with a letter of credit.  We also provide letters of credit for our workers’ compensation insurance.  As of December 31, 2014 and 2013, we had outstanding letters of credit totaling $14.1 million and $17.0 million, respectively, all of which are bond and cash collateralized. The cash collateralized against the letters of credit is recorded in restricted cash on the consolidated balance sheet.


39



Aircraft and Other Leases
 
We have significant obligations for aircraft and engines that are classified as operating leases and, therefore, are not reflected as liabilities on our balance sheet. Aircraft leases expire between 2015 and 2023. As of December 31, 2014, our total mandatory payments under operating leases for aircraft aggregated approximately $550.8 million and total minimum annual aircraft rental payments for the next 12 months under all non-cancelable operating leases is approximately $106.5 million. Other non-cancelable operating leases consist of engines, terminal space, operating facilities, office space and office equipment. The leases expire through 2033. As of December 31, 2014, our total mandatory payments under other non-cancelable operating leases aggregated approximately $110.8 million. Total minimum annual other rental payments for the next 12 months are approximately $16.2 million.
 
Commitments and Obligations
 
As of December 31, 2014, the Company has firm orders to purchase 40 CS300 aircraft that have scheduled delivery dates beginning in early 2015 and continuing through 2017. In January 2014, Bombardier announced that the aircraft would not be expected into service until early 2016. The Company has stopped making pre-delivery deposit payments on these aircraft.

The Company also has a commitment for 47 Embraer E175 aircraft (of which 41 have been delivered as of December 31, 2014) under the American Eagle brand that have scheduled delivery dates currently and through the second quarter of 2015. In addition, the Company has a commitment for 55 Embraer E175 aircraft under the United brand that have scheduled delivery dates between the third quarter of 2015 and the third quarter of 2017. The Company also has a commitment to acquire 11 spare aircraft engines (of which three have been delivered as of December 31, 2014) and expects to take four engines in 2015, three engines in 2016, and one engine in 2017. 

We expect to fund future capital and funding commitments through internally generated funds, third-party aircraft financings, and debt and other financings.
 
Our contractual obligations and commercial commitments at December 31, 2014 include the following (in millions):
 
Payments Due By Period
 
 
 
 
 
 
 
Beyond
 
 
2015
 
2016-2017
 
2018-2019
 
2020
 
Total
Long-term debt (including interest)
$
422.1

 
$
817.1

 
$
725.9

 
$
862.8

 
$
2,827.9

Operating leases
122.7

 
217.6

 
172.9

 
148.4

 
661.6

Tax liability for uncertain tax positions

 

 

 
7.1

 
7.1

Debt or lease financed aircraft purchase obligations(1)
554.2

 
3,832.5

 

 

 
4,386.7

Engines under firm orders
24.6

 
28.0

 

 

 
52.6

Total contractual cash obligations
$
1,123.6

 
$
4,895.2

 
$
898.8

 
$
1,018.3

 
$
7,935.9

(1) Represents delivery of CS300s based on estimated service date of early 2016.

40



The following table represents our maintenance agreements for engines, auxiliary power units ("APU") and other airframe components for our E145, E170/175 and Q400 aircraft:
 
 
Expiration Date of Agreement:
Maintenance Agreements
 
E145
 
E170/175
 
Q400
Engines
 
December 2017(2)
 
March 2027(3)
 
June 2021(2)
APU
 
December 2016
 
July 2019
 
July 2021
Avionics
 
December 2017
 
April 2023
 
NA(1)
Wheels and Brakes
 
December 2019
 
January 2022
 
August 2022 (4)
Parts Pooling
 
December 2017
 
February 2027
 
July 2021
Emergency Slides
 
NA(1)
 
December 2024
 
NA(1)
Tires
 
NA(1)
 
NA(1)
 
July 2021
Propellers
 
NA(1)
 
NA(1)
 
July 2021

(1) Agreements do not exist for the specified maintenance item for the related aircraft type.
(2) Maintenance agreements for engines include life limited parts ("LLPs") for E140/145 and Q400 aircraft. As of
December 31, 2014 and 2013, we had maintenance deposits of $53.2 million and $36.6 million, respectively, for the future replacement of LLPs.
(3) Maintenance agreements for engines on United and Delta E175 aircraft expire December 2018, US Airways E175 aircraft expire December 2022, and American E175 aircraft expire March 2027.
(4) 
Q400 maintenance agreements do not include wheels.

Under these agreements, we are charged for covered services based on a fixed rate for each flight hour or flight cycle accumulated by the engines or airframes in our service during each month. The rates are subject to annual revisions, generally based on certain Bureau of Labor Statistics' labor and material indices.  We believe these agreements, coupled with our ongoing maintenance program, reduce the likelihood of unexpected levels of engine, APU, avionics, wheels and brakes, emergency slides, and select rotable parts maintenance expense during their term. Certain of these agreements contain minimum guarantee amounts, penalty provisions for either the early removal of aircraft or agreement termination for activity levels below the minimums.
    
Total payments under these long-term maintenance agreements were $173.0 million, $163.8 million, and $119.4 million, for the years ended December 31, 2014, 2013 and 2012, respectively. 
 
Cash payments for interest were approximately $110.1 million in 2014. Tax payments in 2014 were not significant and we are not expecting significant tax payments in 2014.

Critical Accounting Estimates
 
The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.
 
Some of those estimates and judgments can be subjective and complex. Consequently, actual results could differ from those estimates.  We consider an accounting estimate to be critical if:

The accounting estimate requires us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made; and

We reasonably could have used different estimates in the current period, or changes in these estimates are reasonably likely to occur from period to period as new information becomes available, and a change in these estimates would have a material impact on our financial condition or results from operations.

We continually evaluate the estimates and judgments used to prepare the consolidated financial statements.  Our estimates are based on historical experience, information from third-party professionals and various other assumptions that we believe are reasonable.  There are other items within our financial statements that require estimation, but are not deemed critical based on the criteria above.  Changes in estimates used in these and other items could have a material impact on our financial statements in any one period.

41



 
Impairments to Long-Lived Assets. We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. We review, at least annually, the estimated useful lives and residual values for our definite lived assets.  As a result of the Company’s impairment test for the indefinite-lived other intangible assets and aircraft and other equipment, the Company recorded impairments for aircraft and other equipment during 2014 and 2013. There were no impairment charges in 2012. See Note 3 in Item 8.  

Chautauqua restructuring asset. We record changes in fair value on this asset when events and circumstances indicate that the underlying assumptions have changed. The recurring fair value measurement of this restructuring has been calculated using an income approach, which requires the use of subjective assumptions. Fair values have been estimated by discounting the cash flows expected to be received over the term of the applicable agreement, using a discount rate based on observable yields on instruments bearing comparable risks and credit worthiness of the counterparty. Critical assumptions used in the fair value measurement primarily include the amount and timing of cash inflows, the discount rate and the probability of whether the call option on the restructured aircraft will be exercised by the counterparty. A change in these assumptions could result in a significantly higher or lower fair value measurement, which would result in a gain or loss during the period in which the assumption changes.

Income Taxes. The Company has generated significant net operating losses (“NOLs”) for federal income tax purposes primarily from accelerated depreciation on owned aircraft.  Certain of our NOLs generated prior to July 2005 and acquired from business acquisitions are subject to an annual limitation under Internal Revenue Code Section 382 (“IRC 382”). The annual limitation is based upon the enterprise value of the Company on the IRC 382 ownership change date multiplied by the applicable long-term tax exempt rate. If the utilization of deferred tax asset, and other carry forwards becomes uncertain in future years, we will be required to record a valuation allowance for the deferred tax assets not expected to be utilized.

At December 31, 2014, we had estimated NOLs, of $1.3 billion for federal income tax purposes that begin to expire in 2015. We have recorded a valuation allowance for $398.0 million of those NOLs. IRC 382, imposes limitations on a corporation's ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of our NOLs would be subject to an annual limitation under Section 382. Any unused NOLs in excess of the annual limitation may be carried over to later years. Management has performed an analysis and concluded that, through December 31, 2014, there was not an ownership change.

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In evaluating the likelihood of utilizing our net deferred income tax assets, the significant factors that we consider include our recent history of profitability, forecasts of our revenue trends and future impact of taxable temporary differences.

During 2014, after considering all positive and negative evidence, we concluded that certain of our deferred income tax assets are more likely than not to be realized. Accordingly, we recognized a $4.8 million benefit in our provision for income taxes, primarily related to the valuation allowance release. At the end of 2014 our net deferred tax asset balance was $548.4 million, against which we maintained a $182.9 million valuation allowance, primarily related to state net operating losses with limited expiration periods.


42




Quarterly Information (unaudited)
 
The following table sets forth summary quarterly financial information for the years ended December 31, 2014 and 2013.

 
Quarters Ended
 
March 31 (1)
 
June 30
 
September 30
 
December 31
Continuing Operations - 2014
(in millions, except for per share amounts)
Operating revenues
$
337.5

 
$
343.0

 
$
349.7

 
$
345.2

Operating income (2)
34.2

 
63.0

 
60.8

 
27.5

Net income(3) (5)
14.0

 
20.1

 
18.5

 
11.7

Income (loss) per share - basic:
 
 
 
 
 
 
 
Income from continuing operations
$
0.28

 
$
0.40

 
$
0.37

 
$
0.23

Income (loss) per share - diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.26

 
$
0.38

 
$
0.35

 
$
0.23

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
49.6

 
49.8

 
49.9

 
49.9

Diluted
54.9

 
52.9

 
53.0

 
51.2

 
 
 
 
 
 
 
 
Continuing Operations - 2013
 

 
 

 
 

 
 

Operating revenues
$
324.7

 
$
336.7

 
$
338.6

 
$
346.5

Operating income (4)
47.3

 
54.6

 
32.8

 
56.3

Net income
11.4

 
16.1

 
4.3

 
16.5

Net income (loss) from Discontinued Operations
$
(11.1
)
 
$
8.5

 
$
(18.1
)
 
$
(0.9
)
Income (loss) per share - basic:
 

 
 

 
 

 
 

Income from continuing operations
$
0.23

 
$
0.33

 
$
0.09

 
$
0.33

Income (loss) from discontinued operations, net of tax
$
(0.22
)
 
$
0.17

 
$
(0.37
)
 
$
(0.02
)
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.22

 
$
0.30

 
$
0.09