I’m writing today to update you on the progress of the restructuring plan we shared in last week’s webcast, including news of an important commitment by a group of our fellow employees.
As you recall, our disappointing first quarter results and the continued impact of high fuel costs mean we have to make some fundamental changes in how we do business. On our first quarter earnings conference call, we announced a plan to improve our business results by $100 million. We have since raised that target to $120 million, which would enable Frontier to produce a profit at the elevated fuel prices we’re seeing in 2011.
The restructuring process really begins by posing a fundamental question to each key stakeholder: “Is Frontier Airlines worthy of continued investment?” Beginning with our Board of Directors, the answer is a conditional yes. Our Board has agreed to permit us to raise additional cash if our management team can show that we have commitments for at least half of the $120 million in financial improvements. We’ve already produced $25-$30 million of this through previously announced fleet and network changes.
The remaining improvements will result from the work we’re doing with several key stakeholders. These include aircraft lessors, distribution partners, other significant suppliers and employee groups — key among them, the Frontier Airlines Pilots Association. While all employees will be impacted ($25 million of our plan is related to labor costs), it was important that the pilot group take a leadership role to instill confidence in other stakeholders.
Over the past two weeks, FAPA leadership has worked with the management team to develop an amendment to the current pilot agreement, known formally as LOA 67. This work included meetings between FAPA leaders and some of our largest stakeholders, including Airbus and General Electric. I can say without question that those partners were impressed by the leadership role being taken by FAPA in our collective efforts.
Over the past few days, I’ve met with groups of Frontier pilots to discuss the restructuring plan and the amendment, which requires ratification by the pilot group. We are asking for an affirmative vote by next Friday, June 17. You should understand that FAPA participation in our restructuring is contingent on the participation of all other stakeholders. We believe that the ratified amendment, combined with other wage and benefit changes, and the fleet and network changes already planned, will be sufficient for our Board to allow us to proceed with raising an additional $70 million. This cash is critical to fund the airline this coming winter, as we complete the remainder of our restructuring program.
I’d like to personally thank FAPA leadership for their understanding of the urgency of this work and for stressing the importance of their members’ participation. I’d also like to thank all the pilots who took time to attend the meetings. It was important to me to see your resolve and commitment to this airline.
I believe ratification will be the watershed event to get other significant stakeholders across the finish line. Conversely, it wouldn’t be an overstatement to say that failure to ratify would likely derail the entire restructuring effort.
I think it’s important that I’m as transparent as appropriate regarding what’s in the FAPA amendment:
First, they have a say in determining their future, because without the restructuring Frontier would no longer be viable.
Second, they obtain equity in Frontier. The Board views the amendment as an investment that should allow pilots to share in the financial rewards of a successful Frontier.
Third, they receive a commitment to future growth made possible by a firm aircraft order for new-generation narrow-body jets.
Fourth, they receive a commitment from management to establish a profit sharing plan for all participating Frontier employees. The plan will return a substantial portion of future profits to the employees who have sacrificed during the restructuring.
Finally, a good faith effort by the Company to attract an equity investment(s) in Frontier would reduce the Company’s ownership of Frontier to a minority interest by Dec. 31, 2014.
In return, FAPA has agreed, subject to ratification, to a reduction in 401(k) matching contributions, sick pay and vacation accruals; deferral of the scheduled snap-back pay adjustments in their collective bargaining agreement; and a two-year extension to the collective bargaining agreement.
Of course, all Republic employees have a vested interest in the success of Frontier. Without Frontier, Republic would have no alternate use for nearly 30 Embraer jets whose disposition would affect hundreds of Republic employees. It’s clear that all employees ultimately benefit by participating in the restructuring.
So how does this affect other employee groups? First, if the Frontier pilots’ amendment is ratified, I will seek similar amendments to Frontier’s labor agreements. For remaining employees, it’s important to start with what we’re not asking. As we were unable to restore the bankruptcy pay reductions as I’d hoped, we do not intend to ask employees for wage concessions. We will, however, make the same changes to 401(k) matching and other vacation and sick pay benefits that are included in the pilots’ amendment. The overall plan will include a way for those participating employees to obtain equity and profit sharing consistent with the Frontier pilots. It’s important that all participating employees share in the future success of Frontier.
I want to lead this effort. So effective today, I will reduce my pay 20% and will forgo any bonus award until all employee groups receive bonus payments.
While this is difficult work for everyone, it’s the effort necessary to secure the future of a great airline. I will write again next Friday with the results of the ratification vote and more details on what happens next.
God bless,
Bryan
