Bsi^blic AipUmcc
JffSS Annual Report
ABOUT THE COVER: Republic's
Boeing 757s entered service in 1985.
A "good neighbor'* jetliner, noted
for quiet operation, they are
powered by fuel-efficient
Rolls-Royce engines. They are used
principally on long-haul routes
from Detroit to the West Coast.
Republic's Travel Agency Advisory
Board meets quarterly to ensure a
quality relationship with the
airline's partners in travel.
Republic's personal and high-tech
training programs instill pride and
productivity in its employees.
Republic AirUnes
1985 Annual Report
Contents
The Company 1
Highlights 1
Letter to stockholders 2
Ten-year summary 4
Management's discussion and analysis 6
1985 in review 12
Route map 18
Financial statements 22
Auditors' report 26
Notes to financial statements 27
Supplemental stockholder information 33
Board of Directors and Officers 36
The Company
Republic Airlines, Inc. - now in its
39th year -
is engaged in the business of
carrying passengers on its scheduled route
system. The Company began service
February 24, 1948, as Wisconsin Central
Airlines. In 1952, its name was changed to
North Central Airlines, which merged with
Southern Airways in 1979. The following
year, Hughes Airwest was purchased. As one
of America's 10 largest airlines. Republic
now serves more than 100 cities in 34 states
coast-to-coast, plus Canada,
Mexico, and the Cayman
Islands in the Caribbean.
Highlights
1985 1984
Percent
Increase
Financial
Operating Revenues . . . .
$1,734,397,000 $1,547,232,000 12.1
Operating Expenses . . . .
$1,568,067,000 $1,447,230,000 8.3
Operating Profit ....
$ 166,330,000 $ 100,002,000 66.3
Net Earnings . . . .
$ 177,006,000 $ 29,511,000 499.8
Net Earnings per Common Share:
Primary
Fully Diluted
$ 4.74
$ 3.98
$
$
.76
.75
523.7
430.7
Stockholders' Equity . . . .
$ 196,081,000 $ 8,640,000 2,169.5
Common Stock Outstanding at Year End ....
33,567,000 30,639,000 9.6
Statistical
Passengers 17,465,000 15,257,000 14.5
Revenue Passenger Miles . . . .
10,736,918,000 8,594,040,000 24.9
Available Seat Miles ....
18,267,960,000 17,113,170,000 6.7
Passenger Load Factor 58.8% 50.2% 8.6 pts.
Cargo Ton Miles 116,943,000 94,773,000 23.4
Number of Employees at Year End:
Full Time
Part Time
. . . .
13,700
. . . .
1,500
12,900
500
6.2
200.0
To our stockholders, employees and friends:
YourCompanyenjoyedthebestfinancial
performance in its history during 1985. Net
earnings reached $177 million on operating
revenues of $1.73 billion. The earnings equate to
$4.74 per share (primary) -- a sixfold improvement
over 1984 when we earned $29.5 million or 76 cents
per share (primary), with operating revenues of
$1.55 billion.
For the year, passenger traffic jumped almost
25 percent over 1984 while seat capacity increased a
modest 7 percent. As a result, 1985 load factor was
59 percent --
nearly a 9 point improvement over the
preceding year. Traffic growth exceeded 30 percent
each month May through December year over year,
and in October and November your Company posted
the highest load factor among the major airlines.
This outstanding financial and traffic performance
is the direct result of actions taken by your
management over the past two years following our
objective of becoming a carrier of preference. This
goal involved all operational elements of the airline
and resulted in a major repositioning of Republic in
the intensely competitive airline industry. We have
dedicated the resources of your Company to building
a competitive hub structure at Detroit,
Minneapolis/St. Paul, and Memphis. These hubs
offer passengers the convenience of single airline
service as they flow through these uncongested
traffic centers. To stimulate traffic growth, we
closely timed arrivals and departures at the hubs to
maximize connecting opportunities for in-bound
passengers. With the April 1985 schedule
modification, connecting opportunities at Memphis
increased 156 percent; at Minneapolis/St. Paul,
88 percent; and at Detroit, 82 percent.
Because of the increased traffic, we placed an
earlier-than-anticipated order for six Boeing 757
jetliners. Three of these quiet and fuel efficient,
190-passenger aircraft already operate on long-haul
flights, principally from Detroit. The remaining
three 757s will join Republic by mid-1986. Republic
has options for future delivery of six more
Boeing 757s.
Daniel F. May
Other 1985 highlights:
Adding eight other aircraft: three
Boeing 727-200s and five DC-9s, bringing
the fleet size to 168 jetliners;
Inaugurating service at 12 additional cities;
Signing agreements with regional airlines for
passenger support at each of Republic's three
hubs;
Opening a state-of-the-art reservations center in
Livonia, Michigan, a Detroit suburb;
Completing major construction programs at key
airports;
Opening expanded Executive Suite lounges in
Detroit, Memphis, and Minneapolis/St. Paul;
Planning First Class service which was
introduced in February 1986; and
Adding front-cabin service to 33 aircraft with
First Class now available on all DC-9,
Boeing 727, and Boeing 757 aircraft.
2
REPublic AIrUnes
We also report with sorrow the October 20 death
of Eric Bramley, a director of the Company since
1976 and previously editor of Aviation Daily, the
airline industry's leading trade publication. His
contribution to the direction of your Company is
gratefully acknowledged and his absence deeply felt.
NWA Inc., parent of Northwest Airlines, and
Republic jointly announced January 23, 1986, an
agi'eement for NWA to purchase Republic for
approximately $884 million. The Northwest-Republic
combination will produce one of America's largest
and most dynamic airlines. When government and
stockholder approvals are received, the resources of
the combined carriers will make a formidable
airline, strongly positioned for further growth.
The association of your Company with Northwest
will benefit Republic's three constituencies --
stockholders, passengers, and employees. As part of
the agreement, NWA will pay $17 a share to
stockholders. Many of those stockholders are
Republic employees who as a group own
approximately one-fourth of the Company. The
rewards to employees result not only from the
increased value of their Republic holdings, but also
from the personal and professional opportunities
created by the merger.
Passengers and shippers will be the real winners
when the airlines combine. Single-carrier service
from cities large and small will be available to a
dozen destinations in the Far East and Southeast
Asia, and eight in Europe. The blending of
Republic's strong domestic route system with the
international resources of Northwest will result in a
financially strong carrier dedicated to providing
quality service.
The merger process is proceeding smoothly
through the Department of Transportation, and we
expect government and Republic stockholder
Stephen M. Wolf
approval soon. Once these are received. Republic
will be combined with Northwest Orient Airlines,
offering travelers a superior network of world-wide
travel convenience.
We want to thank you for the support you have
provided during Republic's 38-year history. It is
dearly appreciated and will long be remembered.
Sincerely,
Daniel F. May [/ Stephen M. Wolf
Chairman of the Board President and
Chief Executive Officer
March 6, 1986
3
Ten-year summary
OPERATIONS (in thousands, except per share amounts)
OPERATING REVENUES
Passenger
Other
OPERATING EXPENSES
OPERATING PROFIT (LOSS)
OTHER EXPENSES (INCOME)
Interest expense-net of capitalized interest
Gain on disposition of property, equipment and lease rights
Other income-net
EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS
Income tax credit (expense)
Extraordinary items
Effect of utilization of tax loss carryforwards
Gain on pension plan termination
NET EARNINGS (LOSS)
NET EARNINGS (LOSS) PER COMMON SHARE
Primary
Fully diluted
OTHER FINANCIAL DATA (in thousands, except per share amounts)
Current assets
Property and equipment-net
Total assets
Total long-term debt and capital lease obligations
Redeemable preferred stock of subsidiary
Stockholders' equity (deficit)
Cash dividends per share of common stock
STATISTICS
Passengers
Revenue passenger miles (000)
Available seat miles (000)
Passenger load factor
Cargo ton miles (000)
Revenue plane miles (000)
1985 1984
$1,598,237
136,160
1,734,397
$1,415,583
131,649
1,547,232
1,568,067 1,447,230
166,330 100,002
90,092
(21,368)
(21,925)
46,799
97,000
(17,316)
(9,193)
70,491
119,531
(50,300)
29,511
(15,802)
45,600
62,175
15,802
$ 177,006 $ 29,511
$4.74 $.76
$3.98 $.75
$ 528,285 $ 302,796
$ 738,332 $ 761,678
$1,286,297 $1,084,909
$ 633,659 $ 675,215
-
$ 28,000
$ 196,081 $ 8,640
17,465,000 15,257,000
10,737,000 8,594,000
18,268,000 17,113,000
58.8% 50.2%
117,000 95,000
172,000 162,000
Includes results of Republic Airlines West, Inc., a consolidated subsidiary, from October 1980 through December 1985.
During December 1985, the subsidiary was dissolved and remaining net assets were transferred to the Company.
4
REptjbLic AirUnes
1983 1982 1981 1980*
$1,388,285
123,209
1,511,494
$1,402,693
127,975
1,530,668
$1,311,951
136,465
1,448,416
$827,678
89,037
916,715
1,542,511 1,493,445 1,431,960 903,491
(31,017) 37,223 16,456 13,224
97,852
(923)
(16,915)
100,703
(2,570)
(21,049)
108,362
(13,369)
(32,326)
48,341
(4,112)
(4,403)
80,014 77,084 62,667 39,826
(111,031) (39,861) (46,211)
(58)
(26,602)
1,940
$ (111,031) $ (39,861) $ (46,269) $ (24,662)
$(4.28) $(1.99) $(2.30) $(1.19)
$(4.28) $(1.99) $(2.30) $(1.19)
$ 263,067 $ 328,640 $ 263,296 $ 249,010
$ 829,830 $ 846,036 $ 882,196 $ 778,375
$1,108,672 $1,186,174 $1,154,567 $1,036,226
$ 759,395 $ 797,287 $ 722,434 $ 652,257
$ 28,000 $ 28,000 $ 28,000 -
$ (22,381) $ 27,938 $ 72,348 $ 117,627
- -
$ .10 $ .20
17,787,000 18,075,000 16,841,000 13,220,000
9,675,000 9,231,000 7,641,000 4,760,000
17,773,000 16,585,000 15,119,000 10,185,000
54.4% 55.7% 50.5% 46.7%
80,000 65,000 51,000 37,000
168,000 156,000 145,000 102,000
1979 1978 1977 1976
$527,792 $408,243 $317,469 $272,365
81,438 79,322 71,165 58,950
609,230 487,565 388,634 331,315
581,177 444,756 360,839 312,024
28,053 42,809 27,795 19,291
20,122 16,673 11,476 9,347
(2,002) (1,306) (8,904) (280)
(1,378) (2,593) (700) (924)
16,742 12,774 1,872 8,143
11,311 30,035 25,923 11,148
1,750 (5,464) (2,885) (3,144)
$ 13,061 $ 24,571 $ 23,038 $ 8,004
$.70 $1.42 $1.38 $.48
$.68 $1.31 $1.23 $.43
$144,691 $107,764 $ 89,088 $ 71,362
$399,632 $314,054 $235,671 $195,807
$549,381 $428,424 $330,336 $271,536
$263,035 $196,637 $142,648 $129,512
$145,514 $113,288 $ 89,266 $ 67,247
$ .20 $ .16 $ .12 $ .10
12,156,000 11,143,000 9,180,000 8,397,000
3,847,000 3,364,000 2,584,000 2,304,000
7,479,000 6,010,000 5,152,000 4,611,000
51.4% 56.0% 50.2% 50.0%
32,000 28,000 23,000 22,000
81,000 71,000 62,000 58,000
5
Management's discussion and analysis
Operating revenues
otal operating revenues
increased 12.1 percent in
1985 to $1.7 billion
following a 2.4 percent increase in
1984, primarily from substantial
gi'owth in passenger revenues.
Representing more than
92 percent of total operating
revenues, passenger revenues
increased 12.9 percent in 1985 due
primarily to the 25.9 percent
gi'owth in scheduled revenue
passenger miles. The impact of
this substantial traffic growth was
partially diminished by a
10.3 percent decline in average
revenue per scheduled passenger
mile (yield) which decreased from
16.63 cents in 1984 to 14.92 cents
in 1985.
The increase in scheduled
revenue passenger miles in 1985
exceeded the increase in capacity
resulting in an 8.6 point increase
in passenger load factor to
58.8 percent. The major route
restructuring implemented during
1985 along with a strong economy,
discount fares which stimulated
leisure travel, and strong support
of Republic Express service
contributed to the growth in
traffic. Discount fares such as the
Ultimate Super Saver Fare were
introduced to stimulate leisure
travel on a capacity controlled
basis. This resulted in an increase
in revenue per available seat mile
even though yields declined.
Increased competition from low
fare airlines has continued to exert
pressure on fares and will continue
to impact yield in the future.
In 1984, passenger revenue
increased 2 percent over 1983
because of the substantially higher
yield of 16.63 cents compared with
14.41 cents in 1983. Scheduled
revenue passenger miles dropped
11.7 percent in 1984 following
inflated traffic levels of 1983
which were stimulated by
extensive fare wars and special
promotions.
Cargo revenues increased
8.4 percent in 1985. On
January 1, 1985, the Postal
Service implemented a system of
competitive bids which determines
carriage of mail by all airlines.
The Company aggressively pursued
these contracts and as a result,
mail ton miles increased
116.2 percent in 1985 while mail
revenue rose 79.5 percent to
$37.2 million from $20.7 million
in 1984. Other cargo revenues
dropped 17.6 percent due to lower
freight yields caused by the
discounting of freight rates and
also a 23.1 percent decline in
freight ton miles.
Operating expenses
Operating expenses increased
8.3 percent in 1985 following a
decrease of 6.2 percent in 1984.
The largest component, salaries
and employee benefits, which
represented 33.8 percent of total
operating expenses in 1985,
increased 4.7 percent over the
previous year. A wage freeze and
Load Factor
(percent)
1981 1982 1983 1984 1985
Elements of
Operating Expenses 1985
Salaries and Benefits 33.8 %
Fuel 23.6 %
Maintenance, Rentals,
and Landing Fees 9.5 %
Agency Commissions 8.4 % J
Depreciation and
Amortization 4.9 % A
Other 19.8%
6
REPublic AirUnes
15 percent pay reduction instituted
in September 1983, utilization of
part-time employees, and lower
starting rates for new employees
which were effective for all
employee gi'oups, enabled the
Company to hold salaries exclusive
of benefits at $410.8 million which
is an increase of less than
1 percent from 1984. This was
accomplished even though the
average number of employees
increased 3.5 percent in 1985.
Employee benefits increased
21.5 percent to $120.1 million in
1985. Amortization of the value of
securities and the preferred stock
profit-sharing dividend for 1985,
both gi'anted to employees in
exchange for pay concessions,
added $16.5 million to employee
benefits compared with $6 million
in 1984.
In 1984, salaries and benefits
decreased 12.8 percent from 1983
as a result of the impact of
employee concessions and a change
in actuarial assumptions for all
defined benefit pension plans
which reduced pension expense by
$8.7 million.
Aircraft fuel expense increased
2.9 percent over 1984. Fuel prices
continued to drop during 1985
resulting in a 4.5 percent drop in
average price per gallon to
80.6 cents in 1985 compared with
84.4cents
in 1984. This followed a
drop of 4.4 percent in 1984 from
88.3 cents in 1983. Expansion of
service and addition of 11 aircraft
in 1985 resulted in an increase of
5.8 percent in revenue plane miles
which accounted for the overall
increase in fuel expense. In 1984,
revenue plane miles decreased
3.3 percent, which contributed to
the 8.1 percent decrease in fuel
expense. Expenditures for
maintenance materials and repairs
increased 19.5 percent in 1985,
largely attributable to interior
modifications and exterior painting
of aircraft. First Class seating now
is offered in all Boeing 727 and
DC-9 aircraft. Agency commissions
increased 26.6 percent as a result
of the 12.9 percent increase in
passenger revenue and because
78 percent of sales were generated
by travel agents compared with
72.5percent
in 1984. In order to
meet the competition, the
Company was forced to expand
override commission programs
throughout the United States.
The expansion of operations
through development of major
hubs at Minneapolis/St. Paul,
Detroit and Memphis and related
marketing activities had
significant impact on other
operating expenses which
increased 15.2 percent. Of this
$41 million increase, $17.1 million
reflects an increase in co-host fees
for computer reservations systems
which increased because of the
higher volume of bookings and
significant rate increases. Outside
services purchased increased
$8.8 million in conjunction with
hub development.
In 1984, other operating
expenses increased 2.6 percent.
The increase in selling and
marketing expense, including
co-host fees for computer
reservations systems of
$5.1 million and $6.4 million
in costs related to route
realignment (including addition of
8 destinations and suspension of
operations at 23 points), were the
factors causing the increase over
1983. Expenditures for advertising
were reduced $7.3 million,
reflecting elimination of numerous
promotions initiated in 1983 and
the adoption of more efficient
direct marketing techniques.
Operating profit
The 1985 operating profit of
$166.3 million was 66.3 percent
over 1984. The operating margin
of 9.6 percent increased from
6.5 percent in 1984, and was
favorably impacted by
improvement in load factor of
8.6 points. The $131 million
increase in operating profit in
1984 was the result of
substantially higher yields and the
6.2 percent reduction in operating
expenses.
Other expenses (income)
Interest expense decreased
7.1 percent to $90.1 million in
1985 as the average prime rate
and outstanding long-term debt
and obligations under capital
leases declined.
Gains from disposition of
property, equipment and lease
rights totaled $21.4 million in
1985 compared with $17.3 million
in 1984 and $923,000 in 1983. In
1983, $13 million was realized
from the sale of tax benefits which
is not expected to occur in the
future.
Interest income from temporary
investments of excess cash
generated $17.9 million in 1985
compared with $6.9 million in
1984 and $2.5 million in 1983.
Income taxes
The Company recorded income
tax expense of $50.3 million in
1985 and $15.8 million in 1984.
Utilization of tax loss
carryforwards of $45.6 million in
1985 and $15.8 million in 1984
was recorded as an extraordinary
7
Management's discussion and analysis (continued)
gain in the financial statements.
In both years, payment of virtually
all of the provision for federal
income taxes was deferred due to
timing differences between
financial and tax reporting. For
additional analysis of income tax
expense and utilization of tax loss
carryforwards, see Note E to the
consolidated financial statements,
page 29.
Gain on pension plan termination
As part of the Company
agi'eement with the pilots' union,
the pilots' defined benefit pension
plan was terminated in 1985 and
replaced with a defined
contribution plan. The Company
had received waivers of the 1981,
1982, and 1983 funding obligations
for this plan. Since assets of the
plan exceeded the fully vested
benefits, the obligation to fund the
waived amounts and other accrued
pension liabilities for the plan
were eliminated resulting in the
recording of a $62.2 million
extraordinary gain in 1985.
Net earnings
Net earnings of $177 million
($4.74 per primary share) were
achieved in 1985 compared with
$29.5 million (76 cents per share)
in 1984 and a net loss of
$111 million ($4.28 loss per share)
in 1983. The 1985 and 1984
earnings include extraordinary
gains of $107.8 million ($2.94 per
share) and $15.8 million (46 cents
per share), respectively.
Inflation and changing prices
For information concerning the
effects of inflation and changing
prices on the Company's
operations, see "Supplemental
stockholder information,"
pages 34 and 35.
Stockholders' equity
Total stockholders' equity
increased $187.4 million in 1985
and $31 million in 1984 primarily
as a result of improved earnings
which generated increases in
retained earnings of $173.3 million
in 1985 and $25 million in 1984.
The remaining increase is
attributable to the exercise of
stock options and issuance of
securities to the Employee Stock
Ownership Plans in connection
with the agreements with
employees for reductions in
salaries and wages.
Cash flow, liquidity and
capital resources
The Company's liquidity position
has improved significantly since
the end of 1983. Cash and
Operating Revenues
and Expenses Per
Available Seat Mile
Net Earnings
(Smillions)
Operating Revenues
H Operating Expenses
(cents)
1981 1982 1983 1984 1985 1981 1982 1983 1984 1985
short-term cash investments were
$59.8 million at December 31,
1983, $123.1 million at
December 31, 1984, and
$300.1 million at December 31,
1985. Cash used in operations
amounted to $73.8 million in 1983,
while cash provided from
operations was $132.3 million in
1984 and $258.7 million in 1985.
During December 1985, all
remaining Republic Airlines West,
Inc., $100 par value Cumulative
Preferred Stock was purchased by
the Company. Following this
purchase. Republic Airlines West,
Inc., was dissolved, with remaining
net assets transferred to the
Company.
Since 1982, the Company has
supplemented its working capital
and conserved cash primarily by
the means discussed below:
1. Reduction of Wages
In September 1983, all
employees, including management.
accepted a wage freeze and
15 percent wage reduction. During
1984, these agreements were
extended for all employee groups
with contract amendable dates in
late 1986 and early 1987 and
contained additional productivity
provisions.
In exchange for the concessions,
the Company agreed to issue
5,529,195 shares of common stock
and provide a profit-sharing
arrangement in the form of
$72.3 million face amount of a new
class of participating,
non-cumulative, non-voting junior
preferred stock with 2,170,000
callable warrant rights to purchase
common stock at $10 per share.
The preferred stock allows the
employees to receive dividends,
based on a per share dividend rate
of 1/10,000 of 15 percent of the
Company's profit (operating profit,
less interest expense and income
taxes to be paid) in excess of
$20 million. The profit-sharing
distribution cannot exceed
$10.8 million in any one year. The
amount to be paid in 1986 for the
year 1985 will be approximately
$6.8 million. In addition, the
Company has agreed not to pay
dividends on common stock
through December 31, 1986, and to
fill one position on the Board of
Directors with an individual of
national prominence to be chosen
by agreement of all the Company's
union groups and reasonably
acceptable to the Company's Board
of Directors. As of the date of this
report, the Board member has not
yet been selected by the union
gi'oups.
2. Pension Contribution Waivers
Pursuant to waivers granted by
the Internal Revenue Service, the
Company deferred pension funding
payments totaling $47.1 million
which were due to be paid to
pension plans for its employees for
Operating Expenses
Per Available Seat Mile
Labor Fuel Other
9.5d
9.0d
8.7$
8.5(t
8.6(}:
1981 1982 1983 1984 1985
Capitalization
I Debt
(Smillions)
Equity
800
700 .
600 -
500 -
400 -
300 -
200 -
100 -
0 -
-100 -
1981 1982 1983 1984 1985*
Includes conversion into common stock of convertible
subordinated debentures called for redemption in 1986
9
Management's discussion and analysis (continued)
the years 1981 and 1982. Payment
of the 1981 and 1982 deferred
amounts plus interest is being
funded over a 15-year period,
commencing in 1983.
As part of the labor negotiations
in 1984, the Company and pilots'
union agi'eed that the Company
would terminate the pilots' defined
benefit pension plan and establish
defined contribution retirement
and health benefit plans. The
Company also received a waiver of
the 1983 funding obligation of
$21.8 million for this pilots'
pension plan. The Company's
obligation to fund its accrued
pension liability for the pilots'
plan has been eliminated because
the assets of the plan exceeded the
fully vested benefits. The
elimination of these accrued
pension liabilities resulted in
recording an extraordinary gain of
$62.2 million in 1985.
3. Sale of Tax Benefits, Aircraft
and Other Property
During 1983, the Company
received net proceeds of
$13 million from the sale of tax
benefits related to the acquisition
of new flight equipment which
were applied to the purchase of
new aircraft. Due to changes in
the tax laws, the Company is no
longer able to sell tax benefits for
new property which it acquires.
During the years 1983 through
1985, the Company received
$56.6 million from the disposition
of aircraft, other property, and
lease rights. Of these net proceeds,
$18.9 million was used to repay
indebtedness, and the balance was
used for working capital.
4. Issuance of Securities
In June 1983, through a unit
offering of 7,480,000 shares of
common stock and 3,740,000
warrants to purchase common
stock, the Company received net
proceeds of $58.3 million which
were used for working capital.
TheCompanyishighly
leveraged. At December 31,
1985, the Company had
long-term debt and capital lease
obligations, including current
maturities, of $726.7 million.
Interest rates float with prime on
27.7 percent of this debt.
At December 31, 1985, the
Company had approximately
$185.9 million outstanding under
its Bank Credit Agreement. The
agreement requires the Company
to meet certain financial covenants
including debt-to-equity ratios and
net-worth requirements, a cash
and short-term cash investments
minimum, limitations on capital
expenditures and additional debt,
and sets restrictions on the
payment of common stock
dividends. The Company expects to
remain in compliance with the
covenants contained in the Bank
Credit Agreement over the
remaining term of the loan based
on assumed operating results.
In February 1985, the Company
sold $150 million of Senior Secured
Trust Notes ($75 million due
February 1, 1990, at 14.625 percent
and $75 million due February 1,
1993, at 15.125 percent). The
proceeds were used to prepay
$110 million under the Bank
Credit Agreement with the net
balance of $35 million, after
discounts and expenses of
$5 million, used to increase
working capital.
During 1985 the Company leased
three used Boeing 727-200 aircraft
and three used DC-9-30 aircraft
under operating leases which
extend for periods ranging up to
five years. The Company also
purchased a used DC-9-30 aircraft.
two DC-9-30 aircraft previously
under operating leases and one
DC-9-30 under a capital lease.
These four aircraft were financed
primarily through an $18.7 million
promissory note. One used DC-9-10
aircraft was purchased in
December 1985. One MD-80
aircraft which was previously
leased was returned to the
Company for scheduled operations.
During the third quarter of 1985,
the Company signed a purchase
agreement with The Boeing
Company for the purchase of six
190-seat 757-2S7 aircraft. Three
were delivered in December 1985
with the remaining three
scheduled for delivery in May
1986. The total cost of the six
aircraft, including Rolls Ro3^ce
engines, spare engines, and parts
is approximately $231 million. The
Company arranged operating lease
financing on the first three
aircraft. Financing for the
remaining aircraft has not been
determined. The Company also has
options to acquire up to six
additional Boeing 757-2S7 aircraft.
The Company has major
terminal expansion and
improvement activities taking
place at each of its three hubs.
Besides significantly expanding the
number of gates, new Executive
Suites and baggage handling
facilities will be included. In
Detroit, planned improvements
include installation of an
underground fueling system, an
addition to the terminal for
baggage handling, acquisition of
additional gates, construction of a
new flight kitchen, and
installation of moving sidewalks.
The Detroit airport improvements
are being financed with proceeds of
$90.5 million of Special Airport
Facilities Revenue Bonds issued by
a municipality. The Company has
10
guaranteed the bond payments.
Projected costs of the Memphis
terminal expansion and
improvements, including baggage
handling facilities, are estimated
at $21.5 million and are being
financed primarily through general
obligation bonds issued by the
airport authority. The Company
has entered into revised lease
agreements at these locations
which provide for increased rent as
a result of these improvements. In
Minneapolis/St. Paul, terminal
additions and improvements are
anticipated to be approximately
$10 million, of which $3 million is
to be paid by the airport authority,
with the remaining portion funded
internally.
In addition, reservations services
have been consolidated to improve
efficiency and reduce line costs. A
new 54,000 square-foot facility in
Livonia, Michigan, a Detroit
suburb, was constructed. The
Capacity and Traffic
Total Available Seat Miles
im- Total Revenue Passenger Miles
(billions)
20-r- -- -- -- -- -- -- -- -- ~
1981 1982 1983 1984 1985
converted into 1,043,919 shares
(see Note M to the consolidated
financial statements on pages 32
and 33 of this report).
On January 23, 1986, the
Company entered into a merger
agreement with NWA Inc. (NWA).
NWA is the parent company of
Northwest Airlines, Inc., a
certified air carrier. Under this
agreement the Company will
become a subsidiary of NWA. On
the effective date of the merger,
NWA will acquire all of the
outstanding shares of the
Company's common stock at a
price of $17 per share. The merger
is subject to several conditions
including approval by the
Company's stockholders and
certain governmental authorities.
For additional information on the
proposed merger, see Note M to
the consolidated financial
statements on pages 32 and 33.
Daily Departures
(December)
202
Minneapolis/ Detroit Memphis
St. Paul
facility began operation during the
third quarter of 1985 and now
answers more than 50 percent of
all reservations calls.
The timing and source of future
capital needs cannot be estimated
and will largely depend on new
and replacement aircraft
requirements. The Company
periodically acquires computer
equipment, ground property and
equipment, and leasehold
improvements. Future capital
expenditures and debt to be
incurred are subject to restrictions
contained in the Bank Credit
Agreement.
In January 1986, the Company
called for redemption all of the
10-1/8% Convertible Senior
Subordinated Debentures and the
13% Convertible Subordinated
Debentures. The 10-1/8% Debentures
were converted into 7,442,400
shares of common stock, and the
13% Debentures are expected to be
11
1985 in review
ForRepublicAirlines, 1985
was The Year of the
Business Traveler.
Attention was focused on how to
attract and retain frequent
business travelers whose loyalty is
essential to a successful airline. To
a large degree, Republic's traffic
and financial records established
in 1985 are the results of the
airline's attractiveness to its
business clients.
During 1985, Republic took
several major steps to enhance its
standing among the important
business traveler market. Those
steps paid off with traffic growth of
more than 30 percent for eight
consecutive months -
May through
December -
and this pace has
extended into January and
February 1986. The ability to
increase traffic significantly, while
establishing only minor increases
in seat capacity, demonstrates the
effectiveness of this effort.
Route realignment
A keyelementincoaxing
business flyers to Republic
was a far-reaching route
realignment finalized in April,
then refined throughout the
remainder of the year.
Strategy called for concentration
of flights at Republic's three
primary airports -
Detroit,
Michigan; Minneapolis/St. Paul,
Minnesota; and Memphis,
Tennessee. Resources were
redeployed, and on April 28,
56 daily departures were added in
Memphis, 22 at Minneapolis/
St. Paul, and 19 at Detroit. This
brought Republic's service level in
these cities to 153, 152, and
178 daily flights respectively. On
the same day. Republic initiated
flights at eight new cities in one of
the largest service expansions in
commercial aviation history.
During 1985, flights were begun
at Pittsburgh and Erie in
Pennsylvania; Albany, Syracuse,
White Plains, and John F.
Kennedy International Airport in
New York; Little Rock, Arkansas;
Louisville, Kentucky; Shreveport,
Louisiana; Appleton, Wisconsin;
Akron/Canton, Ohio; and
Intercontinental Airport, Houston,
Texas.
On December 15, Republic began
flights from Memphis to
Puerto Vallarta, Mexico, and
announced that service between
Memphis and Cancun, Mexico,
would start in January 1986. In
addition, Dayton, Ohio, and Cedar
Rapids, Iowa, were scheduled to
join the route system and this
service was inaugurated in
February 1986.
By concentrating flights at three
key traffic centers. Republic was
able to generate 97 percent of its
available seat miles on flights to
and from these "hubs." This offers
passengers a wide variety of
connecting flights at the hubs and
ensures passengers single-carrier
service for their entire traveling
itinerary.
The success of the route
realignment became evident in
May when passenger traffic
increased nearly 31 percent with
only a 7 percent rise in capacity.
The traffic growth continued at a
record pace throughout the
remainder of the year with growth
exceeding 40 percent
year-over-year in June, October,
November, and December. In
October and November, Republic
posted the highest load factor
among the major airlines.
A change in the Postal Service's
method of awarding mail contracts.
12
REPublic AIrUnes
combined with the route
restructuring, had an impressive
effect on cargo sales and service.
Republic's cargo ton miles
increased 23 percent to
116.9 million in 1985. Particularly
remarkable growth was registered
in mail revenues, closing the year
at $37.2 million, up from
$20.7 million in 1984. Each day in
1985, Republic averaged more than
180 tons of mail, a yearly total of
132.6 million pounds, almost twice
the 1984 level.
Republic Express
Animportantelementin
the record passenger
traffic was the initiation
of Republic Express service to
smaller communities within a
350-mile radius of the three hubs.
Republic Express flights are
provided by regional airlines under
long-term marketing contracts
with Republic. Republic Express
flights are timed to reach the hubs
so passengers can make easy,
convenient connections to Republic
flights.
Republic Express service made
its debut in late April with flights
to Detroit from 16 communities in
Michigan and Ohio. The service
was provided by Simmons Airlines.
On June 1, Express Airlines I, also
operating as Republic Express,
began service at Memphis, and by
year end the airline linked
Memphis with 12 cities in the
southeastern United States.
Republic Express began flights
from Minneapolis/St. Paul in
December, with nonstops to
Aberdeen and Watertown, South
Dakota. By mid-1986. Republic
Express flights will be available to
nine other communities in the
Midwest.
The close relationship between
Republic and Republic Express is
evident in the Republic Express
name and in the marketing
services the airlines offer jointly.
Republic Express flights use
Republic gates and are listed in
computer reservations systems
under Republic's name. Advance
seat selection is offered, and
Republic Express provides the full
fare structure of Republic.
In addition to sharing Republic's
name and identity. Republic
Express partners adopt the high
standards of performance and
McDonnell Douglas DC-9s are
the backbone of Republic's fleet
of 168 jetliners. Republic
operates 134 of the versatile
twin-jets on a route system
spanning 34 states, Canada,
Mexico and the Cayman Islands
in the Caribbean.
1985 in review (continued)
Agents at Republic's new
Livonia, Michigan, reservations
center respond to more than
40,000 telephone inquiries from
Republic passengers each day.
professionalism that Republic
demands of itself.
Facilities expansion
Coupledwiththeroute
restructuring, Republic
embarked on major
construction programs in 1985 to
improve its passenger service
facilities. Emphasis was placed on
enlarging Republic Executive
Suites at key airports with new
suites opening in 1985 at Detroit,
Minneapolis/St. Paul, and
Memphis; another suite opened in
early 1986 at Chicago O'Hare. The
Executive Suites offer business
travelers an opportunity to escape
the passenger concourse and turn
waiting time into productive time.
Work modules, phones, conference
rooms, cash bar, newspapers,
magazines, television, and other
amenities are available. Republic
charges only $75 for first-year
Executive Suite membership and
$50 annually thereafter.
Passenger facilities at hub
airports also were expanded to
better serve Republic's increasing
number of business clients.
Passenger gates at Detroit were
increased from nine to 34;
Memphis from 17 to 42; and
Minneapolis/St. Paul from 11 to
19. Additional improvements were
made to baggage handling areas.
Ramp control towers were
constructed to better orchestrate
the ground movement of aircraft
and support equipment.
In Detroit, Wayne County issued
$90.5 million in bonds to support
Republic construction programs at
Detroit Metropolitan Airport. On
the agenda are additional gate
space, moving sidewalks, an
enlarged baggage building, an
underground aircraft fueling
system, and a flight kitchen - as
well as other remodeling and
expansion programs.
Training
Justasrapidexpansion
forced enlargement of
passenger facilities, the
new-found business success also
demanded professional training
programs for new and seasoned
employees to ensure service
standards were not compromised.
During the year Republic hired
and trained more than
14
1,000 reservations agents to
handle a growing passenger call
volume. Most of the reservationists
are employed at a new,
state-of-the-art reservations center
which opened August 16 in
Livonia, Michigan, a Detroit
suburb. The center employs nearly
800 agents who handle more than
40,000 phone inquiries each day.
Many of the Livonia agents were
hired and trained through a
unique job program for the
unemployed and disadvantaged
offered in conjunction with the
Wayne County Private Industry
Corp. A mixture of federal, state,
and local funds was used to screen,
select, hire, and train workers for
jobs at Republic's Livonia
reservations facility.
The expanded route system
called for additional training of
passenger service personnel.
Nearly 1,600 station agents and
passenger service agents completed
coursework in 1985 during
115 training sessions varying from
one to three weeks. During one
week alone, customer service
personnel conducted 14 classes
simultaneously. In addition to
training its own employees.
Republic also assumed
responsibility for training
customer-contact personnel of
Republic Express. Republic's
computer-based instruction
programs were expanded
significantly to include additional
training modules in reservations,
ticketing, seat selection procedures,
and aircraft weight and balance
calculations. Relying heavily on
Republic-produced videotapes, a
series of training bulletins, and
on-site inspections, the airline
undertook a broad ramp awareness
program. Particular attention was
paid to ground safety, ramp
security, and foreign object damage
to jet engines. A signalman
certification program also was
developed for all Republic workers
responsible for the ground
guidance of taxiing aircraft.
During 1985, Republic recruited
and trained 698 flight attendants
at its Atlanta Training Center. For
each flight attendant position,
50 applicants are considered -
indicative of the high standards
Republic demands. The intensive
month-long flight attendant school
focuses on awareness of customer
needs, passenger service
techniques, emergency medical
procedures, first-aid practices, and
federal rules governing air
transportation.
The Atlanta training facility was
a busy place in 1985. In addition
to flight attendant training, the
bulk of Republic pilot training is
conducted in Atlanta, including
Efficient, coordinated movement
of aircraft and ground support
equipment results from the
efforts of Republic personnel
staffing new ramp control towers
at each of the airline's main
traffic centers.
1985 in review (continued)
Flight crew skills are honed
through frequent visits to one of
Republic's four flight simulators
where instructors can safely
present flight conditions to crew
members and gauge the speed
and effectiveness of their
responses.
that for 337 newly hired pilots.
More than 1,200 other pilots
received simulator instruction in
1985, with 217 receiving initial
Boeing 727 training; 53 in their
initial MD-80 program;
416 received initial DC-9
instruction, and 80 were qualified
for Convair 580s. Refresher and
requalification training saw
another 400 pilots pass through
Republic's complement of four
flight simulators. These programs
are in addition to recurrent ground
school training, required annually
of all pilots and first officers, and
the proficiency checks provided
captains every six months and
given first officers each year.
In addition to training its own
cockpit crews. Republic earned
more than $3.3 million in 1985 in
contract training for other airlines.
FAA inspectors also used Republic
simulators for their annual
training requirements.
Republic uses the latest in
audiovisual technology to
standardize training and reduce
related costs for personnel in the
air as well as on the ground. As
an example, the airline's
audiovisual support included a
video show outlining the pre-flight
responsibilities of a Boeing 727
flight engineer. This eliminated
the costly expense of removing a
Boeing 727 from service for
training and also eliminated the
need for classes to make a field
inspection of the aircraft at this
point in their training program.
Republic's field sales force
participated in quarterly two-day
training seminars to enhance their
professionalism and job knowledge.
Topics included negotiation skills,
counselor selling, and time and
territory management. Emphasis
was given to expanding the sales
staffs knowledge of the eight
computer reservations systems that
list Republic flights. Republic's
automated marketing personnel
developed a detailed manual for
sales managers, outlining the
operations and capabilities of
various computer reservations
systems. This enables the sales
staff to discuss those systems
effectively with their travel agent
partners.
Frequent Flyer Perks
A significantelementinthe
drive to secure business
travelers is Republic's
liberal Frequent Flyer program
which rewards members for
repeated use of Republic flights.
The program's success is evidenced
by the fact that more than one
million business travelers are
Republic Frequent Flyers. Republic
gives Frequent Flyers a free
roundtrip ticket for every
20,000 miles credited to their
account. As 1985 ended. Republic
announced a major Frequent Flyer
improvement- the addition of
Radisson Hotels and Western
Airlines. Pan American World
Airways, along with Hertz and
National Car Rental, remained
members of the program. Thus,
Republic Frequent Flyers now are
able to earn free travel to Hawaii,
Europe, and other international
destinations by traveling on
Republic. Frequent Flyers also
earn mileage awards for using the
services of Radisson Hotels, Hertz,
and National and, in turn, the
three participants offer discounts
and free services to Republic
Frequent Flyers who earn free
tickets.
During 1985, Republic began an
intensive study of its front cabin
service and decided to replace
Business First Class with
First Class -
a move that made its
debut in February 1986. Menus
were studied, modified, and
upgraded; wines sniffed, swirled,
tasted, and selected; other
amenities evaluated, tested, and
chosen; and employees informed,
trained, and motivated to provide
the highest service standards. The
result is a First Class front cabin
that is available to Frequent
Flyers at the same rate as the
Business First Class service it
replaced. Other First Class
passengers pay prevailing industry
rates, generally 30 percent more
than coach fares. The marketing
strategy, again, is to make
Republic attractive to its primary
customers -
frequent business
travelers.
Both the Frequent Flyer program
and front cabin service were key
ingredients in Republic's successful
"Perks" advertising campaign
which was expanded during 1985.
The "Perks" approach effectively
targets business travelers with the
theme, "Perks: You've Earned
Them."
While most attention was paid to
developing the business travel
market. Republic also continued
efforts to capture its share of
vacation and leisure travelers.
These passengers are primarily
motivated by price considerations
and thus highlight the importance
of Republic's yield management
team. The airline was determined
to remain competitive with
low-cost carriers by offering the
same fares in an effort to attract
vacation travelers. As a result.
Republic refined its seat inventory
management and pricing functions
to make certain the proper mix of
discount and full-fare seats were
offered on all flights, which
maximized total revenue while
providing a full range of fares
attractive to all segments of the
traveling public. During 1985,
Republic became an industry
leader in pioneering pricing
initiatives that offered excellent
discounts to vacation and leisure
travelers, stimulating discretionary
travel and contributing to
profitability.
Travel agents
WhileRepublicmarketed
itself directly to the
consumer in 1985, the
airline also took major steps to
increase its visibility with the
nation's travel agencies. More than
80 percent of Republic tickets are
written by travel agents who are a
key element in Republic's financial
resurgence. To supplement the
airline's field sales force. Republic
instituted a telemarketing
department in 1985 so travel
agencies and corporate travel
departments can receive immediate
assistance on the phone from
experienced sales personnel. The
airline also reorganized its sales
staff into three regions
(continued on page 20)
RtpuWjc
Republic Express
Republic Express service, provided
by Republic's regional airline
partners, links Republic hubs at
Detroit, Minneapolis/St. Paul and
Memphis with smaller cities near
these main traffic centers. Under a
joint marketing agreement, the
regional carriers coordinate their
flight schedules to the hubs to
ensure quick, convenient
connections to Republic flights.
Minneapolis/St. Paul
Detroit Memphis
REDublic AirUnes
System Route Map -
March 2, 1986
19
1985 in review (continued)
(continued from page 17)
headquartered at the airline's
hubs, Detroit, Minneapolis/
St. Paul, and Memphis. At the
General Office, an area marketing
staff was formed to provide the
sales regions with timely,
responsive support from senior
marketing officials.
Republic formed a Travel Agency
Advisory Board during 1985. The
membership consists of key travel
agency owners and managers plus
Republic's top marketing staff. The
group meets quarterly to exchange
information, share problems, and
devise solutions. Among the
results of the Board's discussions
was a public reaffirmation by the
airline of its unqualified support
for the travel agency ticket
distribution system and Republic's
opposition to "corporate
self-dealing" whereby a company
establishes a travel agency
primarily for its own benefit.
Republic also played an
important role in the 1985 annual
meeting of the American Society of
Travel Agents in Rome, including
co-sponsorship of closing-day
deliberations and ceremonies.
Republic's Fleet
Number of Aircraft
Aircraft
No. of
Seats
On
Owned Leased Total Order Options
B-757-2S7 190 3 3 3 6
B-727-200 143 15 3 18
MD-80 143 7 1 8
DC-9-50 122 16 12 28
DC-9-30* 95 56 8 64
DC-9-10 78 31 3 34
Convair 580 48 13 13
Total 138 30 168 3 6
Fleet improvements
BecauseofRepublic's
impressive traffic gains
during the year, the
airline ordered six Boeing 757
jetliners to meet increased
demand. Three of the fuel efficient,
190-passenger aircraft entered
service in December and the
remaining three will join Republic
by mid-1986. Republic has options
for future delivery of six more
Boeing 757s.
The Boeing 757s are used on
long-haul flights, principally from
Detroit to the West Coast. Load
factors on these flights have been
excellent while fuel consumption
and noise generation have been
remarkably low.
Republic added eight other
aircraft to its fleet in 1985 -
three
Boeing 727-200s and five
McDonnell Douglas DC-9s.
In addition to the fleet
expansion. Republic's maintenance
and engineering division undertook
a number of major modifications to
Republic aircraft to improve
passenger comfort. Republic's
DC-9-lOs were reconfigured to
include a First Class forward
cabin. This standardized Republic's
jet fleet, which allowed First Class
service to be offered on all legs of
a passenger's itinerary. In
addition, a project was begun to
install new trimline seats in all
Republic DC-9-30 aircraft. Seating
capacity will increase from 95 to
100 and at the same time
passengers will receive extra leg
room, thanks to the latest
technology in passenger seating
comfort.
Republic's maintenance and
engineering division helped
*DC-9-30 aircraft will have 100 seats effective June 15, 1986.
develop several advances in
maintenance technology which will
become standards in the airline
industry in the future. For
example, Republic was the first
airline to use portable horoscopes
for detailed inspections of engine
combustion chambers. The new
equipment and procedures allow
careful inspections while the
engine is still mounted on the
aircraft. This reduces the need to
remove and dismantle engine
components. Republic also installed
a computerized machining center
at its Atlanta maintenance base
which will save more than
$250,000 annually in metal
fabrication expenses. This center is
used to create engine gearboxes,
seat track channeling, bearing
liners, and other components.
Republic was the airline that
pioneered bead-blasting for
stripping paint from aircraft
exteriors. The stripping process,
using recyclable plastic beads, is so
precise it allows the removal of a
single coat of paint without
roughing up the fuselage. An
aircraft can be stripped and
repainted every five days instead
of every seven days.
Maintenance and engineering
personnel also were eager to share
their cost-saving ideas through the
Company's suggestion program. A
team of three mechanics developed
a probe to be installed in DC-9
auxiliary power units that is
credited with reducing carbon seal
failures on an average of 18 power
units annually. Another mechanic
initiated a program to develop
in-house a component of the DC-9
temperature control system, while
a worker in Republic's sheet metal
shop designed, manufactured, and
installed the lower panel of cockpit
doors, saving expensive
replacement purchases from an
outside supplier. Other ideas made
similar contributions.
In late 1985, the Federal
Aviation Administration released
results of an intensive study of
maintenance programs at
300 airlines and found Republic
with the lowest percentage of
unsatisfactory maintenance
inspections among the major
airlines -
a credit to the pride and
professionalism of the 2,900 men
and women of the maintenance
and engineering division.
Summary
A firmfocusonfrequent
business travelers was
Republic's success formula
in 1985. An effective route system
coupled with professional, caring
employees who provide quality
service consistently, attracted new
passengers and retained the
loyalty of Republic's Frequent
Flyers.
Travelers can work or relax
away from the hubbub of airport
passenger concourses by
becoming Republic Executive
Suite members. A variety of
amenities cater to the needs of
frequent business passengers.
Consolidated balance sheets
(in thousands)
ASSETS December 31
1985 1984
CURRENT ASSETS
Cash and short-term cash investments
Accounts receivable-less allowances.
.
Parts and supplies-less reserves
Prepaid expenses and other
$ 300,085
158,108
35,657
34,435
528,285
$ 123,143
109,193
38,898
31,562
302,796
PROPERTY AND EQUIPMENT OWNED
Flight equipment
Ground property and equipment
Less accumulated depreciation
924,199
130,067
1,054,266
419,797
634,469
891,776
113,312
1,005,088
361,154
643,934
PROPERTY AND EQUIPMENT UNDER CAPITAL LEASES
Flight equipment
Ground property and equipment
Less accumulated amortization
153,828
12,468
166,296
62,433
103,863
157,145
16,281
173,426
55,682
117,744
DEFERRED CHARGES AND OTHER ASSETS 19,680
$1,286,297
20,435
$1,084,909
22
REpublic AIrLInes
LIABILITIES AND STOCKHOLDERS' EQUITY December 31
1985
CURRENT LIABILITIES
Current maturities of long-term debt $ 83,802
Current obligations under capital leases 9,207
Air traffic liability 128,647
Accounts payable 76,776
Accrued compensation and vacation benefits 58,230
Accrued interest 18,506
Accrued pension liability 7,067
Other accrued expenses 33,466
415,701
1984
$ 59,696
8,712
84,661
43,776
46,872
11,214
22,464
26,751
304,146
LONG-TERM OBLIGATIONS
Long-term debt-less current maturities . . .
Noncurrent obligations under capital leases
Long-term pension liability and other
509,434
124,225
40,856
674,515
538,282
136,933
68,908
744,123
COMMITMENTS AND CONTINGENCIES (Notes B, D, I and L)
REDEEMABLE PREFERRED STOCK OF SUBSIDIARY -
28,000
STOCKHOLDERS' EQUITY
Preferred stock-authorized 25,000,000 shares of $.01 par value
Common stock-authorized 60,000,000 shares of $.20 par value;
outstanding-33,567,241 shares in 1985 and 30,639,390
shares in 1984 6,713 6,128
Additional paid-in capital 129,097 114,664
Retained earnings (deficit) 55,076 (118,176)
Employee stock to be issued 15,699 26,571
Unearned compensation for stock to be issued (10,504) (20,547)
196,081 8,640
$1,286,297 $1,084,909
The accompanying notes are an integi'al part of these statements.
23
Consolidated statements of operations
(in thousands, except per share amounts)
Year Ended December 31
OPERATING REVENUES 1985 1984 1983
Passenger .
$1,598,237 $1,415,583 $1,388,285
Cargo 83,832 77,318 76,626
Other 52,328 54,331 46,583
1,734,397 1,547,232 1,511,494
OPERATING EXPENSES
Salaries and benefits 530,911 506,905 581,496
Aircraft fuel 369,912 359,417 390,937
Agency commissions 132,180 104,420 102,258
Rentals and landing fees 79,084 75,290 76,863
Maintenance materials and repairs 69,485 58,167 58,111
Depreciation and amortization 76,482 74,008 70,625
Other 310,013 269,023 262,221
1,568,067 1,447,230 1,542,511
Operating profit (loss) 166,330 100,002 (31,017)
OTHER EXPENSES (INCOME)
Interest expense 90,092 97,000 97,852
Interest income
Gain on disposition of property, equipment
(17,897) (6,870) (2,468)
and lease rights (21,368) (17,316) (923)
Sale of tax benefits -
(13,046)
Other-net (4,028) (2,323) (1,401)
Earnings (loss) before income taxes
46,799 70,491 80,014
and extraordinary items 119,531 29,511 (111,031)
INCOME TAXES 50,300 15,802 -
Earnings (loss) before extraordinary items 69,231 13,709 (111,031)
EXTRAORDINARY ITEMS
Effect of utilization of tax loss carryforwards 45,600 15,802 -
Gain on pension plan termination 62,175 - -
107,775 15,802 -
NET EARNINGS (LOSS)
NET EARNINGS (LOSS) PER COMMON SHARE
PRIMARY
.
$ 177,006 $ 29,511 $ (111,031)
Before extraordinary items $1.80 $.30 $(4.28)
Extraordinary items 2.94 .46 -
Net earnings (loss)
NET EARNINGS (LOSS) PER COMMON SHARE-
FULLY DILUTED
$4.74 $.76 $(4.28)
Before extraordinary items $1.53 $.29 $(4.28)
Extraordinary items 2.45 .46 -
Net earnings (loss) $3.98 $.75 $(4.28)
The accompanying notes are an integral part of these statements.
24
REpublic AIrUnes
Consolidated statements of changes in financial position
(in thousands)
Year Ended December 31
CASH AND SHORT-TERM CASH INVESTMENTS
AT BEGINNING OE YEAR
1985 1984 1983
. .
$123,143 $ 59,781 $125,484
FUNDS PROVIDED
Earnings (loss) before extraordinary items 69,231 13,709 (111,031)
Add non-cash items:
Depreciation and amortization 76,482 74,008 70,625
Amortization of unearned compensation 10,043 6,024 -
Other 3,881 1,043 1,966
Net change in certain working capital items 53,476 21,749 (35,381)
Cash provided from (used in) operations,
exclusive of extraordinary items 213,113 116,533 (73,821)
Extraordinary items 107,775 15,802 -
Extraordinary item not affecting cash (62,175) - -
Cash provided from (used in) operations 258,713 132,335 (73,821)
Net book value of property and equipment
dispositions 4,335 10,285 2,372
Increase in long-term obligations 166,267 2,181 30,887
Deferral of pension payments 22,088 23,010
Issuance of common stock and warrants 11,289 36 62,532
Other 24,455 6,386 4,875
465,059 173,311 49,855
FUNDS USED
Additions to property and equipment 57,804 15,926 59,969
Payment of long-term obligations 183,222 75,866 44,985
Redemption of preferred stock 28,000 - -
Payment of cash dividends on preferred stock 3,754 4,550 1,820
Employee stock issued 10,872 - -
Other 4,465 13,607 8,784
288,117 109,949 115,558
INCREASE (DECREASE) IN CASH AND
SHORT-TERM CASH INVESTMENTS 176,942 63,362 (65,703)
CASH AND SHORT-TERM CASH INVESTMENTS
AT END OF YEAR . .
$300,085 $123,143 $ 59,781
INCREASE (DECREASE) IN CASH FROM CHANGES
IN CERTAIN WORKING CAPITAL ITEMS
Accounts receivable . .
$ (48,915) $ 10,497 $ 1,284
Parts and supplies 3,241 10,864 (393)
Prepaid expenses and other (2,873) 2,272 (1,021)
Air traffic liability 43,986 11,183 5,341
Accounts payable 33,000 2,288 (12,415)
Accrued expenses (1985 excludes pension
liability relating to extraordinary item) 25,037 (15,355) (28,177)
$ 53,476 $ 21,749 $ (35,381)
The accompanying notes are an integral part of these statements.
25
Consolidated statements of changes in stockholders^ equity
Years ended December 31, 1983, 1984 and 1985
(in thousands)
Ck)minon Stock
Shares
Additional
Paid-In
Retained
Earnings
Employee
Stock to
Unearned
Compen-
Issued Amount Capital (Deficit) be Issued sation
Balance at January 1, 1983 .
22,066 $4,413 $ 53,811 $ (30,286) $ $
Cash dividends on redeemable preferred stock . .
- - -
(1,820) - -
Issuance of common stock and warrants
.
8,564 1,713 60,819 - - -
Net loss for 1983 - - -
(111,031) - -
Balance at December 31, 1983 .
30,630 6,126 114,630 (143,137) -- --
Cash dividends on redeemable preferred stock . .
- - -
(4,550) - -
Issuance of common stock 9 2 34 - - -
Employee stock to be issued .
- - -
26,571 (26,571)
Amortization of unearned compensation .
- - - -
6,024
Net earnings for 1984 - - -
29,511 - -
Balance at December 31, 1984 .
30,639 6,128 114,664 (118,176) 26,571 (20,547)
Cash dividends on redeemable preferred stock . .
- - -
(3,754) - -
Exercise of stock options
Issuance of common stock under
110 22 398 -- - -
employee stock agreements
Tax benefit derived from issuance
.
2,818 563 10,306 -
(10,872) -
of employee stock - -
3,729 - - -
Amortization of unearned compensation .
- - - -
10,043
Net earnings for 1985 - - -
177,006 - -
Balance at December 31, 1985 .
33,567 $6,713 $129,097 $ 55,076 $15,699 $(10,504)
The accompanying notes are an integral part of these statements.
Auditors^ report
GrantThomton S Member Firm
Grant Thornton International
Stockholders and Board of Directors
Republic Airlines, Inc.
We have examined the consolidated balance sheets of Republic Airlines, Inc. (a Wisconsin corporation) and its subsidi
ary as of December 31, 1985 and 1984, and the related consolidated statements of operations, changes in stockholders'
equity, and changes in financial position for the years ended December 31, 1985, 1984 and 1983. Our examinations
were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the ac
counting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the consolidated financial position of Republic
Airlines, Inc. and its subsidiary as of December 31, 1985 and 1984, and the consolidated results of their operations
and changes in their financial position for the years ended December 31, 1985, 1984 and 1983, in conformity with
generally accepted accounting principles applied on a consistent basis.
AOu\A
Minneapolis, Minnesota
February 17, 1986
26
REPublic AIrUnes
Notes to financial statements
December 31, 1985, 1984, 1983
Note A -
Summary of Significant Accounting Policies
1. Principles of Consolidation: The consolidated financial state
ments include the accounts of Republic Airlines West, Inc., a
wholly owned subsidiary. All significant intercompany trans
actions have been eliminated. In December 1985, Republic Air
lines West, Inc. completed a plan of dissolution whereby all of
its remaining assets and liabilities were transferred to Republic
Airlines, Inc.
2. Parts and Supplies: Spare parts and supplies relating to flight
equipment are priced at average cost. An allowance for obsoles
cence ($16,213,000 at December 31, 1985, and $15,660,000 at
December 31, 1984) is provided for repairable parts by allocating
their cost over the life of the related aircraft.
3. Prepaid Expenses-Engine Overhaul: The Company reclassi
fies to a current prepaid expense the estimated portion of the
purchase price of flight equipment attributable to its overhaul
expected to be consumed within the next 12 months ($21,149,000
at December 31, 1985, and $21,070,000 at December 31, 1984).
Actual overhaul costs are charged to expense as incurred.
4. Property, Equipment and Depreciation: Owned property and
equipment are stated at cost. Property and equipment acquired
under capital leases are stated at the lower of the present value
of minimum lease payments or fair market value at the incep
tion of the lease. Depreciation and amortization of property and
equipment are based on the straight-line method. Estimated
useful lives range from 10 to 20 years for flight equipment and
3 to 25 years for ground property and equipment. Residual
values vary from zero to 15%. Property and equipment under
capital leases and leasehold improvements are amortized over
the lease term or the estimated useful life of the asset, which
ever is less.
5. Deferred Charges: Expenses incurred in connection with the
issuance of long-term obligations are deferred and amortized on
a straight-line basis over the terms of the related obligations.
6. Passenger Revenue: Passenger revenue is recognized when
the transportation service is provided. Tickets sold but unused
are classified as a current liability.
7. Retirement Plan Costs: The Company has defined benefit and
contribution plans covering all employee groups. Current service
costs are accrued and funded on a current basis. For defined
benefit plans, prior service costs are amortized over varying
periods up to 40 years with funding determined under the unit
credit, aggregate frozen liability, and individual entry age
normal methods.
8. Income Taxes: The Company uses the flow-through method
of accounting for investment tax credits which reduces income
tax expense when the related liability is reduced. Investment
credits not applied currently are offset against deferred income
taxes to the extent they are applicable to previously deferred
taxes becoming payable in the carryover periods. The Company
recognizes deferred income taxes resulting from differences in
financial and income tax reporting.
9. Reclassification: Certain amounts for 1984 and 1983 have
been reclassified to conform with the 1985 financial statement
presentation.
Note B -
Sale of Tax Benefits -
The leasing provisions of the
Economic Recovery Tax Act of 1981 allowed the Company to
enter into sale-leaseback transactions for income tax purposes
involving certain equipment additions. As a result of these trans
actions, the Company recognized other income (net of related
expenses) of $13,046,000 in 1983, $17,752,000 in 1982, and
$28,930,000 in 1981. Provisions of these transactions include,
among other things, indemnification of the buyer against loss
of the stipulated tax benefit amount.
Note C -
Long-Term Debt -
All flight equipment and certain
ground property and accounts receivable (accounts receivable
of $38,060,000 at December 31, 1985, and $38,511,000 at
December 31, 1984) are pledged as collateral against the long
term debt, consisting of the following at December 31 (in
thousands):
1985 1984
Bank Credit Agreement (a) $185,895 $333,154
Installment notes (b) 142,021 140,507
Equipment trust notes:
14-5/8%
due February 1, 1990 (c) 73,056
15-1/8%
due February 1, 1993 (c) 72,901
9% due May 1, 1993 (d) 23,550 26,700
Due July 1, 1998 (d) 6,746 7,265
Subordinated debentures (e);
13% called in 1986 12,360 13,310
10-1/8% called in 1986 73,353 73,278
Sundry 3,354 3,764
Total long-term debt 593,236 597,978
Less current maturities (f) 83,802 59,696
$509,434 $538,282
(a) The balance at December 31, 1985, is scheduled to be retired
with quarterly installments aggregating $58,425,000 in 1986,
$35,500,000 in 1987, $38,000,000 in 1988 and 1989, and a final
payment of $15,970,000 in 1990. The Company is required to
prepay indebtedness under the Bank Credit Agreement to the
extent the Company achieves profits in excess of specified
27
Notes to financial statements (continued)
December 31, 1985, 1984, 1983
amounts, and from net proceeds from the disposition of flight
equipment. Included in the 1986 aggregate quarterly in
stallments is a prepayment of $29,425,000 due in April 1986.
Interest is paid monthly to each participating bank at 1/2% over
the Citibank, N.A. alternative rate or other rates as negotiated
with the individual bank participants. The effective rate at
December 31, 1985, was 10%.
Current covenants in the Bank Credit Agreement, as amended,
require the maintenance of debt-to-equity ratios and place re
strictions on dividend payments and capital expenditures. The
most restrictive covenant requires the maintenance of minimum
tangible net worth, as defined in the Bank Credit Agreement.
The Company and the banks executed letter amendments and
agreements during 1985 which amend the covenants and, based
on assumed operating results, will allow the Company to remain
in compliance over the remaining term of the loan.
The Company is required to maintain average compensating
balances of 10% of the monthly average loan outstanding and
to pay interest on any compensating balance shortfall at 1/2%
over the Citibank, N.A. alternative rate. During 1985 the
Company was required to maintain average compensating
balances (adjusted for float) of $24,089,000. At December 31,
1985, the required compensating balance (adjusted for float) was
approximately $21,611,000.
(b) Consists of various installment notes with final maturity
dates from 1986 through 1998 at a weighted average interest
rate of 15-1/4%. The aggregate installment payments in 1986
will be approximately $36,973,000 including interest.
(c) The equipment trust notes were sold at approximately 97% of
face value (unamortized discount of $4,043,000 at December 31,
1985) with maturities of $75,000,000 on February 1, 1990, and
February 1, 1993. These senior secured trust notes are secured
by aircraft.
(d) The equipment trust notes due May 1, 1993, require semi
annual sinking fund payments of $1,575,000 from 1986 through
1992 and $1,500,000 at maturity plus interest. The Company
may make semiannual optional sinking fund payments up to
$1,575,000 and may pay off the remaining balance in full on
or after May 1, 1988, at a premium.
The equipment trust notes due July 1, 1998, require semiannual
sinking fund payments of approximately $259,000 plus interest
at rates ranging from 3/4% to 1-1/2% over the Citibank, N.A.
alternative rate. The effective rate at December 31, 1985, was
10-1/4%. The Company may pay off the remaining balance in
full at any time without a premium.
(e) The 13% convertible subordinated debentures due
November 15, 1993, have interest payments due semiannually.
The debentime holder may convert the principal to common stock
of the Company at $11.84 per share (1,043,919 shares at
December 31, 1985) subject to adjustment. The debentimes were
called for redemption in January 1986 (see Note M).
The 10-1/8% convertible senior subordinated debentures were
issued at 97-1/2% of face value (unamortized discount of
$1,646,000 and $1,722,000 at December 31, 1985 and 1984,
respectively). Interest payments are due semiannually, and
debenture holders may convert the principal to common stock of
the Company at $10 per share (7,499,900 shares at December 31,
1985). The debentures were called for redemption in January
1986 (see Note M).
(f) Current maturities of all long-term debt due in each of the
next five years following December 31, 1985, are as follows (in
thousands):
1986 $ 83,802
1987 53,613
198
57,397
198
55,840
199
106,891
Note D -
Leases -
The Company has lease commitments for
flight equipment, various airport facilities, its main operating
facilities, its maintenance and training facilities, and other prop
erty and equipment. The lease commitments for airport facili
ties are based upon space usage and landings and are subject
to adjustment depending upon the needs of each airport oper
ating authority and, therefore, certain amounts of the commit
ments are not determinable.
As of December 31, 1985, the Company leased 30 of its 168 air
craft, 18 of which were capital leases. Expiration dates range
from 1986 to 2004. Under 24 of the lease agreements, the
Company has the option to purchase the aircraft at the end of
the lease term, The Company's obligations relating to the air
craft capital leases were $128,648,000 at December 31, 1985.
In 1986, the aggregate payments for aircraft under capital leases
will be approximately $18,976,000 including interest at a
weighted average rate of 9-3/4%.
In addition, the Company has various types of ground property
and computer equipment under capital lease agreements. The
debt obligations relating to the capitalization of these leases
were $4,784,000 at December 31, 1985. The aggregate payments
in 1986 will be approximately $3,007,000 including interest at
a weighted average rate of 13-1/8%.
28
During 1985, $90,500,000 of special facility airport revenue
bonds were issued by a municipality to improve airport facili
ties which are being leased by the Company. The Company has
guaranteed the bond payments. Lease payments of $325,373,000
approximate the principal and interest due under the bonds, net
of estimated investment earnings. These payments are included
in the table below under operating leases.
At December 31, 1985, future minimum lease payments under
capital leases and noncancellable operating leases with initial
or remaining terms of more than one year were as follows (in
thousands):
Operating Capital
Leases Leases
1986 $ 45,046 $ 21,983
1987 54,156 18,966
1988 53,162 18,777
1989 49,436 18,605
1990 46,155 18,845
Thereafter 749,438 129,431
Total minimum lease payments $997,393 226,607
Less amounts representing interest 93,175
Present value of future minimum capital
lease payments $133,432
Rental expense under operating leases was $59,358,000 in 1985,
$53,050,000 in 1984 and $50,444,000 in 1983.
Note E -
Income Taxes -
Income tax expense for the years
ended December 31 was as follows (in thousands):
1985 1984 1983
Federal $44,200 $14,253 $
State and local 6,100 1,549 ^
$50,300 $15,802 $ ^
Deferred income taxes of $2,020,000 were reinstated during
1984.
Differences between income tax expense and amounts derived
by applying the statutory federal income tax rate of 46% to
income before income taxes were as follows (in thousands):
1985 1984 1983
Income tax expense (credit) at statutory
federal income tax rates $54,984 $13,575 $(51,074)
Investment credits
State and local taxes net of
(12,254) "
federal income tax benefit 6,100 1,549 -
Non-taxable permanent differences . . .
Tax effect of net operating loss
1,396 668 797
carryforwards not recognized -
-
50,268
Other 74
$50,300
10
$15,802
9
$
For federal income tax reporting purposes the Company and its
subsidiary file separate tax returns. Republic Airlines, Inc. had,
as of December 31, 1985, net operating loss carryovers of approx
imately $63,551,000 available to offset future taxable income,
all of which expire in 1998. Investment tax credits of $45,860,000
are available to offset future income taxes payable and expire
as follows: $9,041,000 in 1994; $17,120,000 in 1995; $6,035,000
in 1996; $4,099,000 in 1997; $2,905,000 in 1998; $3,324,000 in
1999; and $3,336,000 in 2000.
Republic Airlines West, Inc. had, as of December 31, 1985, net
operating loss carryovers of approximately $71,897,000 avail
able to offset future taxable income. Approximately $30,133,000
expires in 1994, $23,674,000 in 1995 and $18,090,000 in 1996.
Investment tax credits of $7,179,000 are available to offset
future income taxes payable and expire as follows: $370,000 in
1993; $4,481,000 in 1994; $402,000 in 1995; $1,724,000 in 1996;
and $202,000 in 1997.
For financial reporting purposes, the Company and its sub
sidiary calculated income taxes on a consolidated basis. On this
basis, as of December 31, 1985, there are approximately
$23,000,000 of net operating loss carryovers available to offset
future taxable income, and investment tax credit carryovers of
approximately $30,000,000 are available to offset future tax pro
visions. Any future utilization of the preacquisition net oper
ating losses or investment credits of Republic Airlines West, Inc.
will be recorded as adjustments of the original purchase trans
action. The Company has made certain stock contributions
attributable to the 1985 plan years for the employee stock agree
ments (see Note I). These stock contributions result in a tax
deduction in excess of the comparable book deduction, thereby
creating a permanent difference. The tax benefit derived from
this permanent difference was computed at current rates thereby
utilizing approximately $12,000,000 of investment tax credits.
This net tax benefit of $3,729,000 was charged to income tax
expense and credited to additional paid-in capital.
The Internal Revenue Service has examined and cleared the
Company's federal tax returns through December 31, 1979.
During 1984, the Company reversed various tax liability
accruals of approximately $2,000,000 which resulted from the
settlement of an Internal Revenue Service examination.
Note F -
Retirement Plans -
The Company has retirement
plans covering all employee groups. Pension expense for 1985,
1984, and 1983 was $17,889,000, $24,726,000 and $36,784,000,
respectively. The Company has either made contributions to the
plans equal to the amounts accrued for pension expense or has
29
Notes to financial statements (continued)
December 31, 1985, 1984, 1983
obtained minimum funding waivers from the Internal Revenue
Service.
During 1984, 1983, and 1982, the Company obtained minimum
funding waivers which are amortized over not more than 15
years. During 1985, the pilots' defined benefit pension plan was
terminated and replaced with a defined contribution retirement
plan. This termination resulted in the elimination of the Com
pany's obligation to fund $62,175,000 of the waived amounts,
which resulted in an extraordinary gain (see Note G). At
December 31, 1985, the remaining unamortized liability,
including accrued interest for pension waivers, was $22,497,000
of which $1,132,000 is due in 1986.
In 1984 the assumed rate of return used in determining the actu
arial present value of accumulated benefits for all defined benefit
pension plans was increased from 7-1/2% to 8-1/2% and remained
at 8-1/2% during 1985. The effect of this change was to increase
1984 net earnings by approximately $8,714,000 or $.25 per share
and to decrease the present value of plan benefits by approxi
mately $35,542,000.
The accumulated plan benefits and plan net assets for all of the
Company's defined benefit plans, except the pilots' plan which
was terminated during 1985, were as follows (in thousands):
January 1
1985 1984
Actuarial present value of accumulated
plan benefits:
Vested
Nonvested
$137,018
4,465
$124,944
3,790
$141,483 $128,734
Net assets available for benefits $123,824 $114,023
In addition to providing pension benefits, the Company provides
certain health care benefits for retired employees. Substantially
all of the Company's employees may become eligible for those
benefits if they reach retirement age while working for the
Company. The cost of retiree health care benefits is recognized
as expense as claims are incurred. Those costs totaled approxi
mately $3,000,000 in 1985 and $1,800,000 in 1984.
Note G -
Pension Plan Termination -
As part of an agree
ment with the Air Line Pilots Association, International, the
Pilots Retirement Income Plan, a defined benefit pension plan,
was terminated and replaced with a defined contribution retire
ment plan. The Company received approval from the Pension
Benefit Guarantee Corporation and the Internal Revenue
Service to terminate this plan. By June 30, 1985, annuities had
been purchased to provide for all accrued pension benefits.
Because plan assets exceeded fully vested benefits, no further
funding was required by the Company. As a result, the Company
was able to eliminate accrued but unfunded pension liabilities
related to the Pilots Retirement Income Plan. The reversal of
these accruals resulted in an extraordinary gain to the Company
of $62,175,000 during the second quarter of 1985. Excess plan
assets were allocated to plan participants in the form of addi
tional benefits prior to application for termination of the Plan.
There is no tax effect on the gain for financial reporting pur
poses, as the pension accruals were not deducted on Company
tax returns.
Note H -
Warrants, Options and Stock Appreciation
Rights -
During the second quarter of 1983, the Company
issued 3,740,000 warrants in connection with a unit offering of
common stock and warrants. The warrants, all of which were
outstanding at December 31, 1985, enable the holders to pur
chase common stock at $10 per share through May 15, 1986.
In 1982 the Company granted 155,500 warrants to certain
lenders in consideration for debt restructuring. The warrants,
all of which were outstanding at December 31, 1985, enable the
holders to purchase common stock at $8 per share through
August 26, 1990.
On September 1, 1983, an officer of the Company was granted
an option to purchase 25,000 shares of common stock at $4.25
per share. The entire option was exercised during 1985.
On February 24, 1984, an officer of the Company was granted
an option to purchase 95,000 shares of common stock at $4,125
per share. The option is exercisable as follows: 50,000 shares
on February 20, 1985, and 45,000 shares on February 20, 1986.
The option expires February 24, 1992. During 1985, 25,000
shares of common stock were purchased under this option.
Stockholders approved a Stock Option and Stock Appreciation
Right Plan (the "Plan") at the 1984 annual meeting. The Plan
provides that options and/or stock appreciation rights may be
granted to officers and key employees of the Company. An
aggregate of 750,000 sheires of common stock is reserved for issu
ance under the Plan upon exercise of options and stock appreci
ation rights. Amounts payable upon the exercise of stock
appreciation rights are payable in cash or shares of common
stock, as the Company may determine at the date of grant. A
maximum of 750,000 options and 750,000 stock appreciation
rights may be granted under the Plan.
30
The following table summarizes Plan activity:
Stock
Options
Stock
Appreciation
Rights
Price
per Share
Outstanding at
December 31, 1983
. . .
- -
Grants
.
432,650 373,150 $3.50 -
$5,375
Forfeitures
.
(20,100) (9,600) 3.50
Outstanding at
December 31, 1984
. . .
412,550 363,550 3.50 -
5.375
Grants
.
115,817 111,550 6.125 -
9.125
Exercises
.
(59,450) (54,350) 3.50 -
5.375
Forfeitures
.
(29,400) (29,350) 3.50 -
6.50
Outstanding at
December 31, 1985
. . .
439,517 391,400* 3.50 -
9.125
Exercisable at
December 31, 1985
. . .
106,900 85,717* 3.50 -
5.375
*Includes 35,000 rights exercisable for cash or common stock.
All of the stock options and stock appreciation rights gi'anted
under the Plan expire on various dates through 1995. Assuming
any future stock appreciation rights are exercisable for cash
only, as of December 31, 1985, an additional 304,250 stock
appreciation rights were available for grant and there were
216,033 shares available for stock option grants under the Plan.
Note I -
Employee Stock Agreement -
During 1984 all of the
Company's employee unions ratified amended labor agi'eements.
The agreements provide for the extension of a 15% pay reduc
tion and wage freeze through the contract amendable dates
ranging from September 30, 1986, through March 31, 1987.
Other terms of the agreements include additional wage and/or
productivity concessions equivalent to 8% of payroll and certain
pension plan changes. The Company's management employees
are participating in similar concessions. In exchange for the con
cessions, the Company agreed to issue 5,529,195 shares of
common stock and 7,230 shares of a new class of participating,
non-cumulative, non-voting junior preferred stock with
2,170,000 callable warrant rights to purchase common stock at
$10 per share. As of December 31, 1985, 2,600,000 shares of
common stock had been issued to trusts for the benefit of
employees. The remaining shares of common stock and the
junior preferred stock with warrant rights will be issued in 1986.
Failure of the Company to restore the wage concessions may
result in the issuance of additional junior preferred stock.
The junior preferred stock will not be publicly traded and
represents a form of profit-sharing arrangement. The face
amount will be $10,000 per share, for a total of $72,300,000.
Participation will be through dividends based on a per share
dividend rate of 1/10,000 of 15% of the Company's annual profit
(as defined) in excess of $20 million, commencing with the year
1985 (payable in 1986) and thereafter until the face amount has
been paid, after which time the shares of preferred stock are
convertible into 7,230 shares of the Company's common stock.
The maximum participation in any one year will be limited to
15% of the original face amount. For purposes of determining
participation, "profit" will be consolidated operating profit less
interest expense and income taxes to be paid. The preferred
shares will have liquidation preferences equal to 200% of the
face amount, less all payments made thereon. Based on 1985
earnings, approximately $6,800,000 of profit-sharing dividends
will be payable in 1986. The Company records these dividends
as expense during the year they are earned.
The warrant rights are callable when the trading price of the
common stock averages $15 per share for 20 consecutive trading
days. One half of the warrant rights will be exercisable at any
time from the date of issue through September 30, 1986. The
remaining warrant rights will be exercisable from October 1,
1986, through September 30, 1990.
The estimated value of the securities described in the preceding
paragi'aphs, as determined at the date of grant, was $26,571,000
and is being amortized as additional compensation expense over
the duration of the underlying employee agi'eements. During
1985 and 1984, the Company recorded amortization of
$10,043,000 and $6,024,000, respectively.
The Company also agreed to fill one position on the Board of
Directors with an individual of national prominence to be chosen
by agreement of all the union groups and reasonably accept
able to the Company's Board of Directors. This Board member
has not yet been selected by the union gi'oups. The agreements
also prevent the Company from paying dividends on common
stock through December 31, 1986.
Note J -
Net Earnings (Loss) Per Common Share -
Pi imai'y
earnings per common share for 1985, 1984 and 1983 were based
on the weighted average number of common and common
equivalent shares outstanding of 36,697,852; 34,139,472; and
26,720,591; respectively. In 1985 and 1984, common shares out
standing included 5,529,195 shares relating to employee stock
agreements, of which 2,600,000 shares were issued in 1985 (see
Note I). Common equivalent shares included 261,638 shares in
1985 and 46,220 shares in 1984 from the assumed exercise of
stock options and warrants.
In 1985, fully diluted earnings per common share assumed con
version of the 10-1/8% convertible senior subordinated deben
tures into 7,499,992 shares, the 13% convertible subordinated
debentures into 1,114,126 shares, and included 414,716 addi
tional common shares from the assumed exercise of stock options
and warrants. Fully diluted earnings per common share in 1984
31
Notes to financial statements (continued)
December 31, 1985, 1984, 1983
included the assumed issuance of 228,975 additional common
shares relating to the stock bonus plan for pilots and conver
sion of stock options. In 1983, fully diluted loss per common
share was the same as primary, as the assumed conversion of
convertible debentures and exercise of stock options and war
rants were antidilutive.
Net earnings were reduced or net loss increased by preferred
dividend requirements of $3,147,000 in 1985, $3,640,000 in
1984, and $3,337,000 in 1983 prior to computing the per common
share amounts. In the fully diluted calculation for 1985, net
earnings were adjusted for interest relating to the convertible
debentures, net of income tax and profit-sharing effect. This
amounted to $4,137,000 for net earnings per common share
before extraordinary items, and $4,221,000 for net earnings per
common share for the extraordinary items.
In January 1986 the Company's 10-1/8% convertible senior
subordinated debentures were called for redemption (see Notes
C and M). If these debentures had been converted into common
stock as of January 1, 1985, primary earnings per share would
have been $1.57 in 1985 before extraordinary items and $4.09
for net earnings.
Note K -
Preferred Stock and Redeemable Preferred
Stock of Subsidiary -
During 1983, the Company authorized
25,000,000 shares of $.01 par value preferred stock. As of
December 31, 1985, no preferred shares have been issued. These
preferred shares are issuable in series with terms to be desig
nated by the Board of Directors.
The Company's subsidiary. Republic Airlines West, Inc., had
authorized 500,000 shares of $100 par value cumulative pre
ferred stock. In February 1981, the subsidiary issued 280,000
shares in a private placement in connection with aircraft acqui
sition and financing transactions. Cumulative dividends were
payable quarterly at an annual rate of $13 per share. The
Company had the right to purchase the shares at any time at
$100 per share plus all unpaid dividends. Effective with an
amendment dated June 14,1984, the stockholder could require
the Company to purchase 17,500 shares quarterly beginning
February 1, 1985, and exercised this option throughout 1985.
During December 1985, all of the remaining outstanding shares
were purchased by the Company. Following this purchase.
Republic Airlines West, Inc. was dissolved, with the remaining
net assets transferred to the Company.
Note L -
Purchase Commitments -
At December 31, 1985,
the Company had on order three Boeing 757 aircraft and certain
spare parts. Delivery of the aircraft is scheduled in 1986, with
delivery of spare parts scheduled in 1986 and 1987. Deposits
of $9,459,000 have been paid as of December 31, 1985. Future
payments under these contracts approximate $102,685,000 and
$3,284,000 in 1986 and 1987, respectively. The Company has
options to purchase up to six additional Boeing 757 aircraft on
which nonrefundable deposits of $1,560,000 have been paid. The
delivery schedule of the option aircraft will be determined at
the time the options are exercised. The Company may substi
tute Boeing 767 or 737-300 aircraft for the option aircraft. These
options expire in December 1986.
The Company intends to obtain leveraged lease financing for
the three Boeing 757 aircraft to be delivered in 1986, and con
sequently, the deposits on these aircraft are classified as current
assets.
Note M -
Subsequent Events
1. Proposed Acquisition by NWA Inc.: On January 23, 1986,
after approval by the Executive Committee of the Board of
Directors of the Company and the Board of Directors of NWA
Inc. ("NWA"), the Company and NWA entered into an Agree
ment and Plan of Merger (the "Merger Agreement"), a Parent
Stock Option Agreement, and a Company Stock Option Agree
ment. NWA is a holding company whose principal subsidiary
is Northwest Airlines, Inc.
Pursuant to the Merger Agreement and subject to approval by
the Company's stockholders, regulatory approvals, and other
closing conditions, a wholly owned subsidiary of NWA will
merge with the Company (the "Merger"). The Company will
become a subsidiary of NWA. At the effective time of the Merger,
shares of the Company's common stock will be converted into
the right to receive in cash $17 per share. The Company's
employees who hold stock options and stock appreciation rights
will receive cash for each option or stock appreciation right share
equal to the difference between $17 and the per share option
or stock appreciation right exercise price.
Under the Parent Stock Option Agreement, the Company may
purchase up to 2,500,000 shares of NWA common stock at a price
of $46,125 per share. Under the Company Stock Option Agree
ment, NWA may purchase 9-1/2% of the shares of the Company's
common stock outstanding immediately prior to exercise,
excluding shares issued upon conversion of the Company's con
vertible debentures, at a price of $10.75 per share, and may exer
cise the right to receive appreciation (payable in cash or, subject
to certain limitations, at the option of the Company, in shares
of the Company's common stock) above $10.75 per share on an
additional 9% of such outstanding shares. The options may be
exercised only upon the occurrence of certain events. NWA paid
the Company $5,000,000 for its option and will pay an additional
$500,000 per month, up to an additional $2,500,000, following
approval by the Company's stockholders, until the Merger is
effected.
32
The Merger is subject to several conditions, including:
(a) approval of the Merger by the Company's stockholders,
(b) receipt of certain governmental approvals without any con
ditions or restrictions which have a material adverse effect on
the financial condition, operations or prospects of NWA and the
Company, (c) there being no material adverse change since Sep
tember 30,1985, in the financial condition of the Company, and
(d) compliance with other closing conditions as set forth in the
Merger Agreement. Prior to effecting the Merger, NWA will also
offer positions on its Board of Directors to five persons cuiTently
serving on the Company's Board of Directors.
NWA has agreed to pay the Company an additional $2,500,000
if the Merger is not concluded for any reason other than failure
of the Company's stockholders to approve the Merger or a mate
rial breach of the Merger Agreement by the Company. In the
event of failure to obtain stockholder approval or a material
breach by the Company, the Company must repay the option
payments received from NWA.
The Company's stockholders will be voting on the Merger at
the annual meeting scheduled for April 23, 1986. If stockholder
approval is obtained and the other closing conditions are satis
fied, the Company and the NWA subsidiary organized for the
purpose of effecting the Merger will execute and file Articles
of Merger with the Secretary of State of Wisconsin, at which
time the Merger will be effective.
2. Redemption of 10-1/8% Conveidible Senior Subordinated
Debentures: In January 1986, the Company called for redemp
tion all of its outstanding 10-1/8% convertible senior subordi
nated debentui'es. The debentm'es were subject to redemption on
March 3, 1986, at $1,070.88 plus accrued interest of $21.66 for
each $1,000 principal amount of debentures. The debentures
were convertible into common stock at $10 per share. The right
to convert the debentures expired at the close of business on
February 14, 1986, and $74,424,000 principal amount of the
debentures was converted.
The Company made arrangements with an investment banking
firm whereby the firm agreed to acquire from the Company all
of the shares of stock that would have been delivered upon con
version of the debentures, for those debentures that were either
surrendered for redemption or for which no action was taken
prior to the conversion termination or redemption dates.
3. Redemption of 13% Convertible Subordinated Debentures:
In January 1986, the Company called for redemption all of its
outstanding 13% convertible subordinated debentures. The
debentures are to be redeemed on April 15, 1986, at 105% of
the principal amount plus accrued interest. The debentures are
convertible into common stock at $11.84 per share. The right
to convert the debentures expires at the close of business on
March 31, 1986.
Supplemental stockholder information
QUARTERLY SUMMARIES OF OPERATIONS
(unaudited-in thousands, except per share amounts)
1985 1984
Three Months Ended Three Months Ended
December 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31
Operating revenues $449,343 $448,558 $455,591 $380,905 $357,611 $385,514 $410,489 $393,618
Operating expenses 417,075 398,264 389,834 362,894 348,334 357,015 366,758 375,123
Operating profit 32,268 50,294 65,757 18,011 9,277 28,499 43,731 18,495
Earnings Goss) before
extraordinary items 2,669 24,164 39,992 2,406 (5,667) 6,138 17,291 (4,053)
Extraordinary items:
Effect of utilization of tax
loss carrjfforwards 10,553 14,220 17,980 2,847 (4,365) 8,437 11,730
Gain on pension plan termination -
-
62,175 - - - - -
Net earnings Goss) 13,222 38,384 120,147 5,253 (10,032) 14,575 29,021 (4,053)
Earnings Goss) per common share-
Primary;
Before extraordinary items . . .
.05 .63 1.07 .04 (.18) .15 .50 (.16)
Net earnings Goss) .34 1.02 3.26 .12 (.30) .38 .85 (.16)
Fully diluted:
Before extraordinary items . . .
.06 .54 .90 .04 (.18) .14 .42 (.16)
Net earnings Goss) .32 .87 2.68 .12 (.30) .36 .73 (.16)
33
Supplemental stockholder information (continued)
EFFECTS OF CHANGING PRICES (unaudited)
Basis of preparation of 1985 supplemental data
As required by the Financial Accounting Standards Board
(FASB), the Company has provided supplemental information
concerning the effects of changing prices on its financial state
ments. The disclosures are intended to address the specific price
changes in the individual resources used by the Company.
Calculations derived from application of the FASB requirement
involve a substantial number of judgements, as well as use of
various estimating techniques that have been employed to limit
the cost of accumulating the data. The data reported should not
be thought of as precise measurements of the assets and
expenses involved, but as reasonable approximations of the price
changes that have occurred in the business environment in
which the Company operates.
The current cost method of accounting adjusts for specific
changes in prices of spare parts inventory, property and equip
ment, and gain or loss from disposition of property and equip
ment. These assets are stated at their current cost (rather than
historical cost) at the balance sheet date.
Current cost asset amounts were derived principally through
a reference guide to current selling prices supplied by the Air
Transport Association. Current cost depreciation is based on the
average current cost of property and equipment during the year.
Depreciation expense was computed by applying the ratio of
historical depreciation expense to average historical asset cost,
to the average current cost of these assets. The result should
be approximately the same as would be calculated using the
depreciation methods used in preparing the primary financial
statements. Current cost does not purport to represent the
amount at which the assets could be sold.
Current tax laws do not recognize deductions for current cost
of depreciation and amortization expense, therefore, income
taxes provided are reported in historical dollars as required.
The gain from the decline in purchasing power was determined
by calculating the changes in monetary assets and liabilities
by utilizing the change in the Consumer Price Index for the year.
In times of inflation, there is a purchasing power loss in holding
monetary assets such as cash and receivables and a purchasing
power gain in holding monetary liabilities such as debt and
payables.
Data developed in compliance with the FASB requirement is
of an experimental nature and should be viewed in that context.
Caution should be used in analyzing and drawing conclusions
from this data.
CONSOLIDATED STATEMENT OF OPERATIONS
-ADJUSTED FOR CHANGING PRICES
Year ended December 31, 1985 (in thousands-unaudited)
Adjusted for Changes
in Specific Prices
(Current Cost)
$1,734,397
As Reported
in the
Primary Statements
Total operating revenues $1,734,397
Depreciation and amortization 76,482
Other operating expenses 1,491,585
Gain on disposition of property, equipment and lease rights (21,368)
Other expenses-net 68,167
Income taxes 50,300
1,665,166
188,877
1,492,668
(15,541)
68,167
50,300
1,784,471
Earnings (loss) before extraordinary items $ 69,231 $ (50,074)
Gain from decline in purchasing power of net amounts owed $ 27,365
Increase in specific prices (current cost) of inventory and property and
equipment held during the year* $ 127,906
Effect of increase in general price level 57,386
Excess of increase in specific prices over increase in general price level $ 70,520
*At December 31, 1985, current cost of inventory was $37,519,000 and the current
cost of net property and equipment was $1,802,282,000, compared with $35,657,000
and $738,332,000 in the historical financial statements, respectively.
34
FIVE-YEAR COMPARISON OF SELECTED SUPPLEMENTARY FINANCIAL DATA
-ADJUSTED FOR EFFECTS OF CHANGING PRICES
(In average 1985 constant dollars, in thousands except per share and price index amounts-unaudited)
Total operating revenues
Current cost information:
Loss before extraordinary items
Per common share
Excess of increase in specific prices over increase
in general price level
Net assets at year end
Other information:
Gain from decline in purchasing power of net amounts owed
Cash dividends declared per common share
Market price per common share at year end
Average consumer price index (1967=100)
Year Ended December 31
1985 1984 1983 1982 1981
$1,734,397 $1,602,437 $1,632,049 $1,705,919 $1,713,215
$ (50,074) $ (130,210) $ (220,748) $ (131,193) $ (123,039)
$ (1.16) $ (3.90) $ (8.39) $ (6.14) $ (5.92)
$ 70,520 $ 78,395 $ 82,546 $ 74,628 $ 148,285
$1,217,931 $1,236,548 $1,226,242 $1,266,126 $1,022,957
$ 27,365 $ 35,749 $ 36,350 $ 37,213 $ 81,149
- - - -
$ .12
$ 10.21 $ 5.49 $ 3.98 $ 8.68 $ 4.72
322.2 311.1 298.4 289.1 272.4
FORM 10-K REPORT
For the Form 10-K report filed with the Securities and Exchange
Commission, write Mr. A. L. Maxson, Senior Vice President-
Finance, Republic Airlines, Inc., 7500 Airline Drive, Minnea
polis, MN 55450.
COMMON STOCK INFORMATION
The following tabulation sets forth the price range for the Com
pany's common stock which is traded on the New York Stock
Exchange and the Midwest Stock Exchange.
1985 1984
High Lovi High Low
1st Quarter S 6-5/8 S5-1/8 $5-1/4 S3-3/4
2nd Quarter 8-7/8 5-7/8 4-1/8 3-1/4
3rd Quarter 10-3/4 8 5-1/8 3-5/8
4th Quarter 12-1/8 8-1/4 5-3/4 4-1/2
The Company has not paid any cash dividends on common stock
since 1981. Certain of the Company's debt agreements restrict
payment of dividends on or the repm'chase of common stock until
certain financial loan covenants are met. Under the employee
stock agreement, the Company cannot pay dividends on common
stock through December 31, 1986. At February 28, 1986, the
Company had 29,606 holders of common stock.
ANNUAL MEETING
Wednesday, April 23, 1986
REGISTRARS AND TRANSFER AGENTS
Norwest Bank Minneapolis, N.A.
Minneapolis, Minnesota 55480
Norwest Trust Company
New York, New York 10005
SECURITIES LISTED
Common Stock (RAD
New York Stock Exchange
Midwest Stock Exchange
Warrants (RAIW)
New York Stock Exchange
AUDITORS
Grant Thornton (formerly
Alexander Grant & Company)
35
REpubLic AIrUnes
Board of Directors and
Daniel F. May
Chairman of the Board
Republic Airlines, Inc.
Cecil A. Beasley, Jr.
Attorney at Law
Washington, D.C.
Hal N. Carr
Chairman of the Executive Committee
Republic Airlines, Inc.
David H. Hughes
President
Hughes Supply, Inc.
(Electrical and plumbing supplies)
Orlando, Florida
Frank W. Hulse
Retired Vice Chairman of the Board
Republic Airlines, Inc.
John M. Lawrence HI
Attorney at Law
Bryan, Texas
Morton B. Phillips
Chairman of the Board and President
OMI, Inc.
(Business investments)
San Francisco, California
Daniel F. May
Chairman of the Board
Stephen M. Wolf
President and Chief Executive Officer
Gramer D. Foster
Senior Vice President-Operations
A. B. Magary
Senior Vice President-Marketing
A. L. Maxson
Senior Vice President-Finance
Henry W. Barkhausen
Vice President and Treasurer
Arnold J. Grossman
Vice President-Marketing Systems
Officers
Directors
G. Frank Purvis, Jr.
Chairman of the Board
Pan American Life Insurance Co.
New Orleans, Louisiana
Henry M. Ross
President
Ross Industries, Inc.
(Machinery manufacturer)
Midland, Virginia
Bernard Sweet
Retired Vice Chairman of the Board
Republic Airlines, Inc.
Richard A. Trippeer, Jr.
Chairman of the Board
Union Planters Corporation
(Bank holding company)
Memphis, Tennessee
Wm. Bew White, Jr.
Counsel to Bradley, Arant,
Rose & White
(Attorneys at Law)
Birmingham, Alabama
Stephen M. Wolf
President and Chief Executive Officer
Republic Airlines, Inc.
Officers
Paul C. Jasinski
Vice President, General Counsel and
Assistant Secretary
W. Thomas Lagow
Vice President-Marketing Planning
Gary H. Lantner
Vice President and Secretary
Lee R. Mitchell
Vice President-Computer and
Communications Service
Bruce R. Nobles
Vice President-Customer Service
R. Terrence Rendleman
Vice President-Maintenance and
Engineering
Frank M. Young III
Partner--Haskell Slaughter
Young & Lewis
(Attorneys at Law)
Birmingham, Alabama
Executive Committee
Hal N. Carr
Chairman
Frank W. Hulse
Daniel F. May
Henry M. Ross
Wm. Bew White, Jr.
Stephen M. Wolf
Audit Committee
G. Frank Purvis, Jr.
Chairman
John M. Lawrence III
Frank M. Young HI
Stock Option Committee
Richard A. Trippeer, Jr.
Chairman
Hal N. Carr
David H. Hughes
Paul E. Schoellhamer
Vice President-Government Affairs
Raymond W. Sellwood
Vice President-Flight
Michael D. Meyer
Controller
Joseph W. Ettel
Assistant General Counsel and
Assistant Secretary
Walter E. Nielsen
Assistant Treasurer
Gloria B. Olsen
Assistant General Counsel and
Assistant Secretary
Ralph Strangis
Assistant Secretary
36
The key element in Republic's
success has been highly motivated,
professional employees both in
customer-contact positions at gates,
ticket counters, aboard aircraft and
at reservations centers, as well as
behind the scenes in computer
rooms, maintenance bases and
hundreds of other key locations -
all working to make Republic the
airline of preference among
frequent business travelers.
BaHiMic Aipi.w
612-726-7411
"Minneapolis,MINNESOTA554"