Midwest Airlines

Republic works to restructure loss-making 50-seat operations at its subsidiary Chautauqua

Republic Airways Holdings has undertaken a restructuring of its Chautauqua Airlines subsidiary that operates 50-seat regional jets with a targeted USD40-60 million improvement by 2013. The company is hoping to overcome the daunting challenge facing all US regional airlines of finding a price point that makes the operation of smaller jets consistently profitable.

During the late 1990s and early 2000s the introduction of the 50-seat regional jet ushered in heady times for US regional carriers as they negotiated high margin capacity purchase agreements with their US legacy partners that allowed for strong profits that often times bested the financial performance of the network carriers they were partners with.

Viable business models continue to evade US regional airlines

Consolidation in the US regional airline industry has failed to mirror the success achieved by the country’s network carriers after the latest round of mergers were completed between Delta-Northwest and United-Continental. The tie-ups in the regional sector have only intensified cost pressures at the consolidating carriers, which have left them searching for a viable long-term business model. In the short term, some of those airlines are attempting to work with their major partners to ease the cost inflation, but it is far from certain if legacy airlines intend to show any sympathy to their feeder partners.

The two largest US regional operators, SkyWest and Republic Airways Holdings, bled a combined USD150 million in losses in 2011 as they endured pain from their attempts to stabilise their business in an uncertain regional marketplace. SkyWest faced a reality check in meeting financial milestones it aimed to achieve through its acquisition of ExpressJet while Republic spent the majority of 2011 wringing USD120 million of costs from its low-cost subsidiary Frontier Airlines. Pinnacle Airlines, in the midst of its own internal restructuring, has pushed back the release of its 2011 financial results.

Republic Airways profitable but down 57.5%

While its peers posted losses, Republic Airways Holdings managed a USD9 million profit on a 7.9% increase in operating revenues to USD767.9 million during the third quarter, despite struggles with its branded division, Frontier, which posted a USD4 million GAAP loss.

Frontier was the company’s answer to revenue diversification in the changing regional airline space even as peers SkyWest and Pinnacle sought increased diversification from adding new major-carrier partners to their capacity purchase portfolios. While Frontier has been troubled since its 2009 acquisition and integration with Midwest Airlines, CEO Bryan Bedford painted a promising future for the division.

Frontier drags on Republic as it prepared to reveal restructuring plan for the entire company

Set for its third quarter earnings call next week, Republic Airways Holdings (RJET) will be presenting its strategy not only for its ailing branded subsidiary, Frontier, but for its three capacity purchase agreement (CPA) subsidiaries.

It is following both SkyWest and Pinnacle in restructuring the company as the result of changes in CPA business imposed by mainline partners. It, too, is feeling the strain and, as with SkyWest and Pinnacle, is in talks with partners to increase the remuneration for its 50-seat aircraft in CPA operations. CEO Bryan Bedford echoed SkyWest in citing rising maintenance costs but added lease rates were now more than the aircraft was worth given the market lease rates for the type.

US airlines to report increasing revenue and strong demand

The distressing economic news this summer made September important in signaling how the US airline industry is performance. Judging from the early operational reports and 3Q2011 guidance issued, traffic and demand are defying the gloom offered by Wall Street and Washington. Indeed, air travel demand is expected to remain strong, which bodes well for the industry's bottom line given the fact capacity continues to tighten.

Still, US airlines are not sanguine about the state of the industry, with most not only pulling capacity in the fourth quarter but signaling the same for 2012 when a number of carriers will be taking delivery of new aircraft but keeping capacity flat. That capacity discipline, in evidence since early Spring when fuel continued its climb, meant the USD6-10 fare hike imposed in mid-September stuck and will likely segue into future hikes as demand remains strong on increasingly tight capacity. For now the hike applies to last minute tickets.

SkyWest reverses 1Q loss, goes beyond anticipated break even

SkyWest resumed profitability in the second quarter when it posted net income of USD1.6 million on USD933.7 million in operating revenues, a dramatic turnaround from the first quarter when it posted its first quarterly loss in 23 years.