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Wednesday, June 29, 2022

Harbor Diversified Inc (OTCMKTS: HRBR) Air Wisconsin Airlines a Microcapdaily Top Runner (More on United Capacity Purchase Agreement 02/2023 & CBA Amendable Dates for HRBR Union Employees Starting 09/2022)

Harbor Diversified Inc (OTCMKTS: HRBR) continues to trade over $2 support levels in recent trading remaining fairly liquid trading between $50,000 and $500,000 per day in dollar volume. HRBR was a 2020 reverse merger that Microcapdaily first reported on HRNR on November 10, 2020 when HRBR was $0.08 per share. Over the past 3 years Harbor Diversified has grown from operating at a loss of $19 million in 2019 to $91.8 million in net income in 2021 with similar numbers expected in 2022. Part of the reason HRBR does not get more traction is because the Company does not issue press releases and while they are “pink current” the Company is an SEC filer recently filings its 10Q on May 9. The Company is making all the right moves, they are profitable and currently hiring for many positions and they instituted a stock buyback program which is ongoing. During 2021 the Company acquired 1,547,006 shares of its common stock on the open market.  

HRBR derives all of its revenues from an agreement with United airlines first signed in February 2017, which was amended in October 2020 and April 2021. The United capacity purchase agreement expires in February 2023, subject to a wind-down period. 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. 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. 

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Harbor Diversified Inc (OTCMKTS: HRBR) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. which is the sole member of Air Wisconsin Airlines LLC a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC, which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC, which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc., which is a non-operating entity with no material assets.

Microcapdaily was among the first to report on HRBR back on November 10, 2020 when HRBR was $0.08 per share before the stock skyrocketed to highs of $3.08 in summer 2021 up over 3800% from our initial article. In our article titled “Air Wisconsin Airlines; the Rise of Harbor Diversified Inc (OTCMKTS: HRBR) by Boe Rimes, November 10, 2020 we reported: “Harbor Diversified Inc (OTCMKTS: HRBR) is making an explosive move up the charts on a massive surge of volume quickly emerging as among the most exciting stories in small caps. HRBR is quickly getting noticed by top traders and the stock has exploded northbound off its $0.05 base.” 

Air Wisconsin operates a fleet of 64 CRJ-200 regional jets under a capacity purchase agreement. with its sole major airline partner, United Airlines, Inc., with a presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of the Company’s operating revenues for the years ended December 31, 2021 and 2020 was derived from operations associated with the United capacity purchase agreement. 

United and Air Wisconsin entered into the United capacity purchase agreement in February 2017, which was amended in October 2020 and April 2021. The United capacity purchase agreement expires in February 2023, subject to a wind-down period. 

The fleet of CRJ-200 jets, were all manufactured by Bombardier, Inc. and offer many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, limited overhead and under seat storage, a lavatory and a galley that allows for in-flight snack and beverage service. The CRJ-200 regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles. 

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HRBR

HRBR has an impressive balance sheet for a stock that is “pink current” according to OTCMarkets. Harbor Diversified is an SEC filer and filed its 10k on March 31, and its 10Q on May 9 for the 3 months ended March 31, 2022 at which time the Company had $384.9 million in assets including $119 million in marketable securities and $25 million in the treasury vs. $165 million in liabilities. Revenues were $66,968,000 for the 3 months ended March 31, 2022 up over the $49,756,000 in revenues the Company posted for the same period the previous year when COVID shutdown affected flights more than they have this year. Net income for the 3 months period was $9 million. 

Alluvial Fund, LP, founded in 2014 and run by David Waters, CFA holds a position in HRBR and recenlty wrote of Harbor Diversified in their Q1 letter to partners. The letter states: “We have added a new special situation to our collection: Harbor Diversified. Harbor is a holding company for Wisconsin Airlines. Ordinarily I have little interest in airlines of any kind, but Harbor Diversified is a special case. At around $2.40 per share, Harbor trades at a steep discount to liquidation value. Harbor trades so cheaply because Air Wisconsin’s capacity agreement with United Airlines expires in February 2023 and United has declined to renew the contract on the same terms. Air Wisconsin is in discussions with United and other airlines on a new contract, but there is a material chance that a contract will not be secured and Air Wisconsin’s fleet will be grounded come next February. ut even in the case that Air Wisconsin fails to achieve a new contract, Harbor’s existing working capital, fleet, and remaining earnings are worth well in excess of the company’s trading price. At year-end, the company had over $2 per share in cash, securities, and interest-bearing receivables net of debt, all future lease payments, and preferred stock liquidation preference. Air Wisconsin will produce pre-tax cash flow of nearly $90 million over the length of its remaining contract. And then there is the fleet itself. Air Wisconsin owns 64 Bombardier CRJ200s. These aircraft are old and the CRJ200 itself is not exactly a popular jet, but they are worth something. At even $250,000 each, less than 15% of book value, that’s $16 million or 25 cents per share. We expect that over the course of the year, Harbor Diversified will either announce a new contract for Air Wisconsin or will begin preparations for an orderly liquidation. In a liquidation scenario, shares are worth north of $3. If a new contract is secured, their value could be substantially higher as investors begin valuing the company as a going concern instead of a liquidation story. For its part, Air Wisconsin seems to be optimistic about securing a new contract. The company is very active on the hiring front, seeking pilots, flight attendants, and mechanics; not exactly the behavior of an airline that expects to shutter permanently in 10 months. 

The controlling shareholders of HRBR are Amun LLC with 20 million shares and representing 31.4% of the Company and Southshore Aircraft Holdings, LLC with 16.5 million shares representing 25.9% of the Company. Richard A. Bartlett, a direction of the Company is a member of the board of managers of Amun, and owns 25.6% of the outstanding equity interests of Amun. Mr. Bartlett also owns 25.6% of the outstanding equity interests of Southshore Aircraft Holdings, LLC making him an indirect owner of 57.3% of HRBR. Mr. Bartlett does not control voting or investment decisions made by Amun or by Southshore and disclaims beneficial ownership of the shares held by Southshore and by Amun, except to the extent of his pecuniary interest therein. 

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Currently trading at a $104 million market valuation HRBR has 47,053,806 shares outstanding. HRBR has $384 million in assets including $25 million in the treasury and $136 million in marketable securities vs. 165 million in liabilities. Over the past 3 years Harbor Diversified has grown from operating at a loss of $19 million in 2019 to $91.8 million in net income in 2021 with similar numbers expected in 2022. The Company also has a stock buyback program in place and acquired 1,547,006 shares of its common stock on the open market during 2021 with the same expected this year. There is a lot of uncertainty surrounding HRBR and its agreement with United airlines which accounts for all of the Company’s revenues, first signed in February 2017, and amended in October 2020 and April 2021. The United capacity purchase agreement expires in February 2023, subject to a wind-down period. United has not renewed the Negotiations are ongoing with United as well as with another major carrier. United has not renewed the purchase agreement and if they don’t HRBR may be forced to liquidate its assets. 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. If HRBR announces a new contract between Air Wisconsin and United the stock will soar, if HRBR is unable to renew the contract Aire Wiscon may have to begin preparations for an orderly liquidation. In a liquidation scenario, shares are worth north of $3. No matter what happens Microcapdaily will be there reporting on it as it happens. We will be updating on HRBR when more details emerge so make sure you are subscribed to Microcapdaily.

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Disclosure: we hold no position in HRBR either long or short and we have not been compensated for this article.

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