MIAMI — Republic Airways Holdings, the nation’s second largest regional airline conglomerate, filed for Chapter 11 Bankruptcy protection las night, citing the need to eliminate turboprops and 50-seat regional jets (RJs) from its fleet, and adjust its capacity purchase agreement (CPA) contract with US legacy carriers. Republic says that it will continue its regular operations while it restructures its business, and honor all supplier and employee contracts and obligations.

Republic wants to shed its Bombardier Q400s and Embraer E145s

Republic has struggled to deal with the growing pilot shortage that afflicts the U.S. airline industry. The airline has faced tumultuous relations with its pilots for some time now, and the overarching sentiment amongst Republic’s various labor groups has decidedly turned against the management team led by CEO Bryan Bedford.

Meanwhile, Republic’s management is stuck between a rock and a hard place. The carrier’s press release cited the difficult economics of both the Embraer E145 RJs operated for Delta Air Lines and the 23 Bombardier Q400 turboprops operated for United. The 18 remaining Q400s are already planned for retirement (to be sold to Flybe) by September 2016, but Republic is keen to expedite the retirement. At the same time, the E145s are the subject of a war of words and lawsuit between Delta and Republic.

Republic Airways (opf. United Express) Bombardier Dash 8 Q400. (Credits: Bombardier)
Republic Airways (opf. United Express) Bombardier Dash 8 Q400. (Credits: Bombardier)

At the core of Republic’s troubles is the aforementioned pilot shortage. Republic has enough pilots at current compensation levels to operate its fleet of 177 Embraer E170 and E175 aircraft. However, the economics of its E145 in particular don’t work with the compensation asked for pilots. Chapter 11 is a natural step which will allow Republic to renegotiate its labor and pilot contracts and CPAs.

In addition, Republic has gained now a stronger negotiating position with its pilots. While the compensation offered is not enough to attract new pilots to fly all 242 of its current airplanes, the recruitment pressure will dissipate as the airline trims its fleet to 177 aircraft. So, Republic can feasibly extract concessions from its pilots, perhaps to the tune of $10 or $20 per hour. And on their end, the pilots won’t want to be stuck on the bottom of another regional airline’s seniority list (the pilot shortage hasn’t quite heated up to the point that would make that a viable option). So they will be forced to stomach a substandard deal just months after winning hard fought concessions from management.

At war with its CPA partners

The broader story with Republic is that its business model was quite simply broken. Somehow, despite a precipitous decline in fuel prices, Republic saw its profit margin decline year-over-year (YOY) in 2015. For the nine months ending September 30, Republic saw its net profit decline 67.0% YOY and its net margin fell from 8.4% to just 2.8% in perhaps the best financial environment for U.S. airlines since deregulation.

While it is rare for a still profitable airline to file for Chapter 11, Republic would certainly lay some of the blame at the feet of its CPA partner airlines, particularly Delta. There is a kernel of truth to the idea that legacies such as Delta have manipulated the warring factions of regional airlines and helped drive a system of low pilot pay and low costs that will now blow up in their face as the pilot shortage heats up. At the same time, Republic signed a contract to operate E145 jets for Delta at the prices it agreed to, and its own inability to operate those jets ultimately isn’t on Delta.

The Atlanta-based carrier claims that Republic’s actions caused it to suffer “millions” in lost profits and direct damages exceeding $1 million. Republic operates 41 E145s and 30 E170/E175s for Delta, which claims that Republic took on additional flying for United in September 2014 that threatened its ability to service Delta’s contracted flights. Republic was banking at the time on Delta, cancelling its remaining E145 flying as the economics of the type declined.

What it didn’t count on was the fall in oil prices, which suddenly and sharply extended the viability of the E145s. Republic was no longer able to get the relief from obligations it needed due to natural fleet progression, and now it will seek that relief in bankruptcy, by eliminating the United Q400s and Delta E145s.

Say goodbye to the CSeries order

Republic’s consolidation to a single-family fleet of Embraer E-Jets (mostly E170s and E175s as well as 5 E190s it operates for Caesar’s Entertainment) is also bad news for its 40 Bombardier CSeries aircraft order. The CSeries order is a relic of the period when Republic owned current ultra-low cost carrier (ULCC) Frontier Airlines. After merging Frontier with Milwaukee-based Midwest Airlines, Republic placed a massive order for the 40 CS300 aircraft as a bet on expansion.

But after Frontier was sold to a consortium of investors lead by Indigo Partners, the ULCC rejected the CSeries for its fleet needs, instead returning to the Airbus A320neo family for replacement and growth. This left an order for 40 CSeries aircraft on Republic’s book, and order which it had already paid deposits for. Initially Republic maintained that scope clauses in the US would loosen to the point that it could operate the smaller CSeries variant, the +/- 100 seat CS100 for CPA partners. But that appears increasingly unlikely, and Republic will likely use Chapter 11 to eliminate the order entirely. The only question is whether the order will be canceled outright, or whether Republic will instead swap the order and its early delivery slots to another airline?