The US regional carriers look likely to become early beneficiaries of the economic recovery that is widely expected as previously postponed public offerings are resurrected.
Two regional operators are poised to be spun off and made public by the major carriers that own them. A third privately owned carrier is planning an initial public offering or flotation of its own.
With the US equity markets rising, initial public offerings have resumed in many sectors, including transport, as evidenced by the recent move of JetBlue Airways. Investors are likely to be attracted by the strong margins that have been posted by regionals.
As expected, Continental Airlines says it will sell a $320 million stake in its Continental Express unit. Northwest Airlines says it is planning a spin-off of its Express I unit, which flies as Northwest Airlink. And Chautauqua Airlines, the privately held operator that flies for US Airways, America West and American Airlines, plans an $85 million offering under the rubric Republic Airways.
Express I, which was acquired by Northwest in 1997, should raise as much as $400 million when it goes public under the Pinnacle name later this year. Northwest will retain a 13% stake in the company and has said it will dedicate at least 49 new regional jets to the operation over the next two years.
Northwest has orders and options for 121 additional regional jets. Here Pinnacle has an advantage over Mesaba, a fellow Northwest Airlink carrier partially owned by the major. It also wants some of these regional jets but has yet to be promised any. Express I now has 34 Bombardier regional jets and 23 Saab 340 turboprops.
The Pinnacle/Express move is seen as a sign of confidence in the management, including chief executive Phil Trenary. At Republic/Chautauqua, chief executive Bryan Bedford has an equally strong reputation. The airline also expects to have an all-jet fleet by August when it retires the last of its Saab 340s in favour of Embraer regional jets.
Like Pinnacle, Republic has the attraction of long-term fixed-fee contracts with its mainline partners. From a situation in which 75% of revenues were generated by fixed-fee contracts last year, Republic expects to reach 100% by August, according to its registration with the Securities and Exchange Commission. Both Pinnacle and Republic have reserved the right to seek out new code-sharing partners in addition to their existing pacts.
Though Pinnacle's strengths - such as guarantees of a minimum annual operating margin of 12% and a target operating margin of 14% through 2006 - are attractive, some analysts have doubts.
UBS Warburg's Sam Buttrick predicts the spin-offs "will dilute, at least modestly, major carrier earnings, depending on how much profit is outsourced to the regional carrier, while beginning the process of balance-sheet restoration".
Source: Airline Business