Great Lakes faces turbulent future

By MJ Clark and Tim Monroe – Wyoming Business Report

CHEYENNE – The fate of the only airline based in Wyoming, Great Lakes Airlines, appears to be in jeopardy after a prospectus to sell more than 5 million shares of its stock, amounting to 37.6 percent of the company, was filed with the U.S. Securities and Exchange Commission, Sept. 7. The filing was first reported in the Wyoming Business Report’s eDaily.

In an interview with the Business Report, Great Lakes President and CEO Chuck Howell repeated assurances that the company planned to continue operating.

Howell later told KGWN in Cheyenne that the company can be expected to be around for “30 more years” and that the activity simply reflects the company’s refinancing effort for its fleet of aircraft.

Cheyenne-based Great Lakes Aviation Ltd.’s largest creditor, the ‘white knight’ that rescued the company in 2002, appears to be ending its long association with Great Lakes.

Stock sale

According to the SEC filing, Great Lakes will receive none of the proceeds from the stock sale, as the 5,371,980 shares belong to Great Lakes’ largest creditor, Raytheon Aircraft Credit Corp., which received the shares in December 2002 as part of a debt-restructuring agreement.

An article in Aviation International News in February 2002, noted that the stock agreement with Raytheon helped the airline “escape a certain brush with bankruptcy.” The deal also contained a proviso for a “strengthened management team” which led to the recruitment of current CEO Chuck Howell. The debt was restructured again in 2007.

On Aug. 31, 2011 Raytheon extended the due date of a $31.8 million balloon payment in aircraft notes from Aug. 31 to Oct. 17. The notes are secured by 25 Beechcraft 1900D planes, which are manufactured by a division of Raytheon.

In the statement filed with the SEC, Great Lakes wrote, “Our cash flows from operations are not expected to be sufficient to fund the balloon payment. In addition to our cash flows from operations, we will need to refinance the obligation with Raytheon Aircraft Credit Corporation (“Raytheon”), our largest single shareholder, secure alternative sources of financing, raise additional capital through an equity offering, or achieve any combination thereof to be able to satisfy this obligation.”

The prospectus outlines the difficulties that Great Lakes faces in making its balloon payment:”In the event that we are unable to obtain new financing, Raytheon may exercise remedies available to it, including the foreclosure and taking of the 25 mortgaged aircraft,” according to Great Lakes’ filing. “If these events occur, we would be unable to fly our scheduled service, our passenger and EAS [Essential Air Service] revenues would cease, and we would be forced to file for protection from our creditors.”

The prospectus also notes that the airline industry has been significantly affected by the economic downturn, which has resulted in weaker demand for air travel, and that there have been a number of airline bankruptcies in recent years.

Great Lakes also leases six additional Beechcraft Model 1900D planes from Raytheon. Raytheon gave notice of lease termination on those six. The first requested aircraft return happened in August, and the last will occur in December of this year.

According to the prospectus, Raytheon has stated that its notice is rescindable and deferrable at any time in the interim at Raytheon’s discretion. Further, Raytheon is willing to sell the six aircraft outright to the company concurrent with the satisfaction of the company’s obligations related to the Raytheon debt on the 25 Beechcraft model 1900D aircraft.

Howell told the Business Report that the Raytheon Corp. has shut down its financing arm and no longer participates in aircraft financing. However, the Raytheon website still contains substantial information about aircraft availability. A request to John Kasle at Raytheon headquarters for clarification of Raytheon’s intentions was not answered by presstime.

Howell also told the Business Report that the airline plans to obtain new financing with a different lender. Howell added that the company has retained Raymond James & Associates to act as an external banking adviser to attract new financing and to “optimize” the repayment terms of the existing debt relative to notes on aircraft. He also said that the company plans to continue normal operations.

According to the company, revenues have steadily increased between 2006 and 2010. In 2006, Great Lakes received $87.6 million. This grew steadily through 2010 when the company had revenues of $125.4 million. Howell has stated recently that the airline is in a sound financial situation.

Great Lakes reported total operating revenue of $125.4 million in 2010, compared with $121.8 million in 2009. First-half 2011 revenue totaled $60.9 million, compared with $59.8 million for the same period a year ago. The company reported net income of $5 million in 2010, down from $5.7 million in 2009. First-half 2011 net income totaled $29,000, compared with $1.2 million a year ago, a decline attributed to higher fuel costs.

Harsh climate for subsidies

Another hurdle facing Great Lakes, and most regional carriers, is the possibility of losses from the Essential Air Service Program. The EAS was put into place after the Airline Deregulation Act of 1978, to ensure that smaller markets retained a minimal level of scheduled air service. However, since 2001, the EAS subsidies have quadrupled to about $200 million a year. Recent press coverage of redundant services for rural airports less than 100 miles from a major hub, and outrageous per-seat subsidies elsewhere, have brought the program to the attention of cost-cutters on Capitol Hill. When the Federal Aviation Administration long-term reauthorization was passed last spring, the House version phased out EAS in its entirety by FY 2013. However, by the time the bill was signed by President Obama this August, that language had been removed.

According to the prospectus, Great Lakes earned approximately 45 percent of its total revenue, or $27.5 million, from the EAS subsidies during the six-month period that ended June 30, 2011. Great Lakes serves 29 EAS communities in its entire route. In Wyoming, only Worland, Laramie and Cody currently receive EAS subsidies.

According to Great Lakes, a route the company flies between Ely, Nevada, and Las Vegas has been ridiculed nationally because of per passenger subsidies up to some $3,000. The company noted that most EAS subsidies are closer to what Sky West will be getting for its flights to Cody: about $31 per passenger subsidy.

Howell and Great Lakes Chairman Doug Voss said they expect that EAS revenues, as a portion of total revenue, will drop in the future, in part “due to our deliberate desire to maximize the utilization of our aircraft and other resources by deploying our resources to larger hubs offering more connecting opportunities to domestic and international air transportation system.” They added that EAS revenues would continue to be an important earnings source for the company.

Continued funding for the EAS was included in the fiscal year 2012 Transportation, Housing and Urban Development Appropriations Bill that has been approved by the Senate Appropriations Committee. Under the Senate bill, EAS would receive $193 million in 2012, including a $143 million appropriation and $50 million in mandatory funding derived from so-called “overflight fees.” The funding is $6.7 million less than fiscal year 2011 funding.

Higher maintenance costs

As of Dec. 31, 2010, Great Lakes operated a fleet of 32 Beechcraft Model 1900D 19-passenger aircraft and six Embreaer Brasilia Model 120 30-passenger planes. Production of both aircraft has ceased; the Beechcraft 1900D last rolled off the production line in 2002, while the Brasilia Model 120 ended serial production in 2001.

Greg Parkhurst, of Hawker Beechcraft, who is charged with disposing of 515 Beechcraft 1900Ds on behalf of Raytheon, said that, “if [the planes are] properly maintained and serviced, they will last a long time.”

Great Lakes’ prospectus notes, that although the planes continue to receive factory parts, manufacturing and engineering support, “We may experience increased maintenance costs as our fleet ages.”

Planning for continued operations

Effective Sept. 1, 2011, Great Lakes and United Airlines renewed their code-share agreement. According to Howell, the code-share agreement allows a passenger in Laramie, for example, to book a flight on Great Lakes that goes to Denver and seamlessly provides the passenger a seat on a United or Frontier flight. Nearly two-thirds of Great Lakes’ passenger traffic is booked under the United Airlines and Frontier Airlines code-share agreements. The company believes the working relationships with the two major airlines are stable and will continue in the future. Great Lakes flights connect with United in Denver, Los Angeles, Phoenix and Las Vegas. Code share flights with Frontier connect in Denver, Los Angeles, Phoenix, and Albuquerque. Great Lakes serves Riverton, Worland, Sheridan, Laramie, Cheyenne and Gillette in Wyoming. The company employs about 1,200 workers.

Wyoming Business Report Editor MJ Clark lives in Lander and can be reached at Freelance writer Tim Monroe lives in Casper and can be reached at

Wyoming Business Report

This article first appeared on the Wyoming Business Report Website.

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