Why Republic Airways Went Bankrupt

Republic Airways, a little known regional airline based in Indianapolis, filed for chapter 11 bankruptcy in February of this year. However, Republic Airways isn't conducting your traditional airline bankruptcy.  

Republic Airways provides regional aircraft, generally 76 seats or lower, and crew for the legacy carriers such as Delta, American, and United. This means the entire business model of Republic is predicated on receiving contracts from the major airlines instead of generating passenger growth or other tactics traditional airlines use to generate revenue. 

Republic Airways has been financially successful over the past few years posting profits in each of the last eight quarters. However, things are not what they seem at Republic. Net profit has dropped 67% in the last year while profit margin has dropped to 2.8% 

For Republic Airways, a combination of a failed investment in Frontier, a massive pilot shortage, and the inefficiency of small regional aircraft has forced Republic to dramatically restructure its business through chapter 11 bankruptcy proceedings.  

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In 2009, Republic Airways purchased Frontier Airlines for $109 million dollars and Midwest Airlines for $31 million dollars as a way to expand its business away from the stagnant regional airline industry. Republic merged Midwest Airlines into Frontier in 2011.  

Frontier had just exited bankruptcy and was beginning its transition to a low cost carrier while Midwest Airlines was a small, struggling carrier known for providing the "best care." The two airlines were not a good fit. 

Republic proceeded to obliterate Midwest's former hub at Mitchell Airport in Milwaukee, alienating Midwest's base of loyal passengers. However, Republic kept faith in the new Frontier, placing a massive order for 40 CS-300 jets, in a deal worth $3 billion dollars. 

After only four years of owning Frontier, Republic sold the airline to Indigo Partners for $145 million dollars. Republic was left with a profit of $5 million dollars and a $3 billion dollar order for 40 CSeries aircraft that Republic now had no use for.  

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In 2010, congress passed a bill that required first officers to have at least 1,500 flight hours, up from 250. This bill, along with a decrease in the number of military trained pilots and low starting salaries for entry level pilots that are frequently in the $20,000 to $30,000 range, has led to a pilot shortage that has greatly affected regional airlines across the U.S. 

Republic Airways in particular has been hit hard by the shortage. In 2015, Republic at one point couldn't fly 4% of its schedule due to the lack of pilots.  

During November and December of last year, Republic was losing a net of 10 pilots a month. After years of  negotiations, Republic was finally able to strike a deal with the pilots union by raising pay to $40 dollars and hour, which equates to a salary of around $40,000 dollars a year.  

While this has since helped Republic retain more pilots, the surge of pilots retiring from legacy carriers will surely push many regional pilots to the mainline carriers and the better pay that comes along with it. 

As a way to deal with the pilot shortage, Republic will be cutting down the size of its fleet from 242 to 177  by getting rid of the inefficient 50 seat ERJ-145s and the turboprop Q400 aircraft. Republic mainly flies the ERJ-145s for Delta Air Lines and Q400s for United Airlines.  

Last year, Republic agreed to operate more flights for United gambling on the fact that Delta would opt out of flying the inefficient ER J-145s. However, the collapse in fuel prices ensured that Delta kept the ERJ-145s in service. Republic, without enough pilots, wasn't able to fulfill its flight obligations which led Delta to sue Republic. 

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Through bankruptcy, Republic is expected to restructure its contracts with the legacy carriers for better terms. 

Republic will also undoubtedly accelerate the retirement of the ERJ-145 and Q400 and erase the CSeries order from its books . 

It has been floated that Republic could ask its pilots to accept a $10 an hour pay cut as a way to cut costs. After just instituting a major pay raise, it would be foolish to throw away all that goodwill, especially for an airline struggling to retain pilots in a pilot scarce world. 

Bankruptcy will give Republic another shot at remaining a profitable enterprise, especially after the blunders of the past few years. However, the road doesn't look easy, especially in this new business climate for regional carriers.