GLUX - Great Lakes Aviation

[Guest HarryLong]

GLUX is interesting. I will be interested to see if they can/will/do keep their subsidies and get financing/refinancing.

[Radio Free Cash Flow]

I have been watching this one for a while. I agree that it's an interesting case. At $.50/share, the company trades at slightly over 1x average free cash flow for the past five years. That's a fairly astounding valuation, but the risks are huge too. Raytheon has indicated it has no interest at all in refinancing the leases on their planes or the senior note. Financing from any other source may be available only at distressed rates. Also, the company doesn't hedge fuel prices at all and lost money this quarter due to fuel price increases. A prolonged period of high fuel prices would put the company under.

 

This is too dangerous for me to play while the financing is uncertain, but I'll be watching the price action after any announcement to see if the market properly discounts the news.

[Packer16]

How have you guys handicapped the subsidy issue?  It appear about 50% of GLUX's revenue is from subsidies that may be in danger of going away.

 

Packer

[thepupil]

Full Disclosure: I do not own this company, I purchased it at $1.10 and then my google alerts inbox was flooded with reports of them shutting down routes, I was able to exit at a 1% loss. I think it may go bankrupt and the equity could be a zero.

 

I just wanted to throw this out there as an interesting situation. If any of you big timers out there want to buy a fleet of 19 year old out of production planes on the cheap, have at it.

 

Great Lakes (or Great Mistakes as its customers deem it) is a regional carrier and the largest recipient of essential air service subsidy. The stock trades for $7.6MM and has tangible equity (rickety old planes, mostly) of $38MM. The company is experiencing extreme duress and its traffic declines have accelerated dramatically due to some regulation changes wrt pilot hours. Amazingly they haven't started to really burn cash and have amoritzed their Sopranos loan from Gordon Bros. a little bit. I suspect this should change. They are not in compliance with covenants and may lose all their assets to their lenders.

 

Additionally, it is losing routes to competitors, is generally hated by its customers (based on my 2 quarters of receiving google alerts and reading editorials written to small town newspapers)

 

They just published their 10-K. So like i said, if you are looking to build a small air force for hopping around to due diligence companies, one of you should recapitalize this thing.

 

VIC

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/97245

 

OTC

http://otcadventures.com/?p=495

 

[gg]

I looked at this a couple weeks ago, and there are three big issues:

 

1) For reasons that I don't fully understand, they are facing a major pilot shortage, and are flying only half the routes they were a year ago

2) They are extremely reliant on government subsisidies, in exchange for providing service to small, regional airports (over 50% of revenue if I remember correctly)

3) They have pretty high interest debt from a PE/Mezzanine fund, and I'd have to imagine they will be happy and prepared to play hardball soon after a default. They have worked with them as they have broken covenants, and increased the interest rates already, so the debt is at double digit interest rates.

 

Doesn't mean it's not a good investment--it very well might be--but the significant debt means you not only have to be right, but that you have to be right soon.

[bizaro86]

I looked at this a couple weeks ago, and there are three big issues:

 

1) For reasons that I don't fully understand, they are facing a major pilot shortage, and are flying only half the routes they were a year ago

2) They are extremely reliant on government subsisidies, in exchange for providing service to small, regional airports (over 50% of revenue if I remember correctly)

3) They have pretty high interest debt from a PE/Mezzanine fund, and I'd have to imagine they will be happy and prepared to play hardball soon after a default. They have worked with them as they have broken covenants, and increased the interest rates already, so the debt is at double digit interest rates.

 

Doesn't mean it's not a good investment--it very well might be--but the significant debt means you not only have to be right, but that you have to be right soon.

 

I can speak to the pilot shortage. After the colgan crash, congress changed the rules on pilot qualifications for regional airlines. The previous standard was 250 hours of flying experience, the new standard is 1500 hours and an (expensive) ATP license. http://www.ainonline.com/aviation-news/aviation-international-news/2013-08-01/1500-hour-pilot-rule-presents-challenges-and-opportunities

 

That's all well and good, and probably makes things safer for everyone. However, it means bigger and better airlines have had a staff shortage, so they've poached staff from GLUX. They have a hard time getting new staff, because its now a six figure commitment to get an ATP, and their starting pay is $16 per hour. http://www.airlinepilotcentral.com/airlines/regional/great_lakes_airlines

 

I actually think the best play here for someone with scale would be to refinance their debt at a lower rate in exchange for an equity kicker of some kind. (Sort of WEB style)

[Radio Free Cash Flow]

OTC Adventures author here. GLUX is probably the single worst call I have ever made on the blog. I go back to that writeup occasionally to remind myself of the danger of assuming too much! Anyway, I am inclined to believe the equity is zero. The lender in this situation is aggressive and will move to protect its collateral at the earliest possible opportunity.

[jouni1]

do you mean the pilots starting wage is 16/hour? 16 bucks an hour seems still extremely low for a skilled professional who is responsible for hundreds of lives. no wonder they can't get pilots if they pay carpenter wages.

 

edit: or is that a normal number for pilots/co-pilots in usa? no wonder flying is so expensive here, if that's the case. the stuertists here make more than 16usd/hour.

 

edit 2: after looking at other regional airlines, they seem to be paying much better wages. it doesn't really look like the pilot shortage is solvable. i mean they obviously can't afford paying the pilots what they want.

[bizaro86]

do you mean the pilots starting wage is 16/hour? 16 bucks an hour seems still extremely low for a skilled professional who is responsible for hundreds of lives. no wonder they can't get pilots if they pay carpenter wages.

 

edit: or is that a normal number for pilots/co-pilots in usa? no wonder flying is so expensive here, if that's the case. the stuertists here make more than 16usd/hour.

 

edit 2: after looking at other regional airlines, they seem to be paying much better wages. it doesn't really look like the pilot shortage is solvable. i mean they obviously can't afford paying the pilots what they want.

 

American pilots basically make nothing to start. A Cape Air first officer makes as little as  $9 hour when he starts. The problem isn't a lack of people who are interested in being pilots, the problem is a lack of people willing to do it for working poor wages. It's always been a "start low, but the end game is big $$" career, but its gotten a bit out of whack.

 

As it relates to GLUX, basically they can't afford to pay what they would need to pay to get the pilots they need. The only way this works out is if someone refinances the debt before the vulture fund picks the bones clean. Unless you're planning on doing that yourself, buying the equity is a wing and a prayer that someone else will refinance them.