August 11, 2008
Smaller Jets Take Toll on Republic Airways
By O'Malley, Chris
It's not just the beat-up airline industry that's troubling locally based Republic Airways Holdings, it's the aircraft itself.
About half the regional jets flown by Republic for major airlines are of a type quickly falling into disfavor with the majors as they buckle under high fuel prices.
About 118 of Republic's 226 aircraft have fewer than 50 seats - too few passengers over which to spread the higher cost of jet fuel to make many of the routes they fly profitable.
That's part of the problem facing Republic and other regional carriers, analysts say.
Regional airlines, under fixed-fee contracts with major airlines, typically pass fuel costs to the big carriers who now are "eating a lot of red ink," said Michael Boyd, principal of Evergreen, Colo., aviation consultancy The Boyd Group.
So the major carriers are reducing use of the 50-and-fewer-seat regional jets. They're terminating contracts with regional carriers almost as fast as they can find an escape clause.
When oil hit $50 a barrel, the [regional jets] were under water. When it got over $50, these became financial submarines," Boyd said.
The trend appears to be partly behind Republic's July 11 announcement that it is cutting 500 jobs, or 10 percent of its work force.
On July 3 - eight days before Republic announced job cuts - United Airlines informed Republic it was exercising its right to terminate a contract with Republic's Chautauqua Airlines, which flies seven, 45-seat Embraer jets for United.
The cancellation did not affect United's contract with Republic's Shuttle America airline, which flies larger, 70-seat Embraer aircraft.
In announcing job cuts this month, Republic CEO and Chairman Bryan Bedford noted that major carriers for which Republic flies were reducing their hub operations in light of soaring fuel costs.
`The combined impacts of fewer aircraft flying and lower utilization rates on our smaller jet aircraft are leaving us with no choice but to adjust our business to current market conditions," Bedford said at the time.
"Nobody, with oil at $130 a barrel, nobody can make money on a 50- seat [regional jet]," Barry Schimmel, business agent at Teamsters Local 135, recalls a Republic executive telling him recently.
Local 135 represents Republic flight attendants and passenger and fleet service employees.
So-called regional jets in the 35- to 50-seat category had been the darling of the commercial airline industry.
They made it economical for major airlines that contracted with small lift providers to shuttle passengers between secondary airports and the airlines' hubs.
When fuel costs spiked, the economics deteriorated quickly. One carrier flying regional jets between Toledo and Cincinnati would have had to double fares to he profitable, Boyd said.
Boyd, who had long forecast the demise of the 50-seat-or-less regional-jet market. now estimates that 835 such aircraft will be pulled from service in the United States by 2013 - a reduction of 31 percent.
Republic owns three airlines. Its Chautauqua Airlines subsidiary exclusively flies the 50-seat-and-smaller jets.
Meanwhile, its Shuttle America operates 70-seat jets and Republic Airline flies the largest Embraer aircraft, with more than 70 seats. The larger Embraer planes are more akin to DC-9 or 737 airliners.
But Republic has been quickly reducing its percentage of smaller aircraft. Between March 2007 and April 2008, it added nine 50-seat- or-smaller jets while putting into service 28 more Embraer aircraft with 70 or more seats. Among its major customers wanting to swap smaller planes for larger ones was Delta Air Lines.
Republic's three airlines fly under contract for Delta, United, US Airways and American Airlines. Another carrier, Frontier Airlines, filed for Chapter 11 bankruptcy last spring and has sought to end its contracts with Republic.
Republic said it is seeking $260 million in damages from Frontier.
Even with half its fleet still consisting of the out-of-favor smaller jets, Republic is better diversified than some.
"Republic's three subsidiaries allow the company to fly for more partners with larger plates than any other regional carrier," Stephen O'Hara of New York investment firm Sidoti & Co. said in a report last month.
Republic officials could not be reached for comment.
Copyright IBJ Corporation Jul 21, 2008
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