Harbor Diversified Inc. (OTCMKTS: HRBR)

$HRBR

Harbor owns 64 50-seat Bombardier CRJ-200 regional jets. Average age of 19.3 years. They are operated under a capacity purchase agreement with United Airlines which accounts for 99.9% of their revenues. The capacity purchase agreement expires 02/2023. Negotiations are ongoing with United as well as with another major carrier. United has announced their fleet strategy includes reducing their 50-seat aircraft departures from 33% of total departures to 10% by 2026. American Airlines has announced their strategy includes significantly reducing such flights, and Delta Airlines plans to eliminate them by 2023.

Also looming is the CBA amendable dates for many of Harbor’s union employees. 82% of Harbor’s employees are represented by a union. Negotiations are currently ongoing with their dispatcher union members, and CBA amenable dates begin 09/2022 with their office, fleet and passenger service employees, and continue 10/2022 with their flight attendants, and 11/2022 with their pilots. These employees likely understand the scope of their negotiating leverage.

Due to, inter alia, a rising interest rate environment, pilot, maintenance, and flight attendance employment shortages, and recovering North American travel United could extend or enter into a new contract with Harbor given completed CBA’s. Harbor’s employees and operational experience are difficult to replace and would drive the outcome. A possibility exists of Harbor selling their current fleet, and leasing different jets or operating United jets. Harbor hired their CFO from United to increase their odds.

I expect FY22 and onwards’ operating performance to closely resemble FY19.

Revenues- $260mm (stand-ready notes receivable included)

Opex- $219mm

EBIT- $41mm

Interest- $2.5mm

(D&A) - $25mm

Taxes (25%)- $4mm

Net Income- $34.5mm

Capex- $6mm

Preferred Dividends- $1mm

Free Cash Flow- $27.5mm

Shares outstanding- 69,816,299

$0.39 FCF/share. Low confidence 3x- $1.18

12.5% ROE, lowered by $138mm of marketable securities, 40% ROE assuming distribution of all marketable securities.

Ten CRJ-200 jets were purchased for ~$400,000 each in FY20. Assuming $400,000 per jet, Harbor’s fleet would be worth ~$25mm. Not reconciling with $125mm ppe (ignoring flight simulator and equipment). Using $25mm for pp&e, and backing out intangibles, book is ~95mm, coming out to $1.36 in liquidation value.

Too many risks, including that large shareholders managed to buy 25% of the Company for three old jets in 01/2020, and is paid $400,000 each year for “financial advisory”. Being minority shareholders for a practically PE owned firm is a bad place to be.

I would purchase shares in the low $1.00’s. Pass.