Regional airlines - Republic Airways' rapid growth

This time round, the regional airlines section will look at the strategy and finances of one of the leading examples of how regional airlines constitute an important and stable portion of the air transport business as they react rapidly and flexibly to new opportunities.

The Republic Airways story is one of opportunism and tenacity in developing an airline that has its bases covered and has demonstrated rapid growth and a pioneering spirit that has enabled it to deliver consistent profitability at margins akin to those of the more readily valued low cost airline sector.

Republic Airways companies

Republic Airways is the Indianapolis based holding company for two airlines - Chautauqua and Republic Airlines. Chautaqua Airlines performs all current services, and Republic Airlines is the vehicle originally set up to operate Embraer 170 aircraft for US Airways. Due to airline certification delays this plan was dropped, but in a move demonstrating the flexibility typical of regional airlines, Republic instead sealed a deal to pioneer United Airlines operation of the 70 seat Embraer 170 aircraft.

Chautauqua will begin operation of the Embraer 170 in October 2004, with service to be provided for United from Washington Dulles and Chicago O'Hare airports. Republic Airlines will take over these services once its operating certificate is issued. In this role Republic will help begin to build back the capacity that United has lost from its Atlantic Coast affiliate that has become FLYi (Independence Air). (Much of the initial replacement capacity is provided by Mesa and Air Wisconsin.)

Introduction of the 70 seat Embraer 170 supplements United Airlines 70 seat services through Air Wisconsin and Skywest Airlines in the mid and western US, which use the Bombardier CRJ700.

Major airline partners

Chautauqua provides capacity to four US majors (proportion of 1H04 operating revenues in parentheses) - United (1%), Delta (36%), US Airways (44%) and American Airlines (19%). As such the risk of any one airline failing is reasonably well spread. Having made that statement, it should be noted that United, Delta and US Airways are perhaps the majors at most risk in today's market.

Republic Airways has 94 Embraer regional jets in service (operated by Chautauqua), with 63 ERJ-145, 15 ERJ-140 and 16 ERJ-135 allocated amongst its major partners broadly as follows:

Delta: 36, United: 6, US Airways: 37, American Airlines: 15

Average daily utilisation of the aircraft in the second quarter 2004 was 10:47 hours (gate-gate time), higher than the utilisation achieved by many airlines with their larger narrowbody aircraft.

Reflections on Republic's flexible strategy

• Delta Airlines at Orlando - Gained agreement with Delta Airlines to replace 328Jet capacity formerly provided by a division of Atlantic Coast Airlines with the higher capacity and longer range ERJ 135, thereby establishing a further major airline base of operations.
• America West - introduced America West regional service at Columbus in 2002, only to be dropped in early 2003. Benefited from a $6m termination payment, and immediately transferred aircraft to serve Delta at Dallas and Orlando.
• American Airlines - took advantage of the pilot scope clause and desire of American to introduce competitive service using ERJ 140s from St Louis in 2002 - aircraft that replaced the ERJ 145s previously in use because reductions in the American Airlines operating fleet meant that pilot scope clause* restrictions were invoked.
• United Airlines - took advantage of the need for United to build a 50 and 70 seat operation to replace capacity previously provided by Atlantic Coast Airlines and also to meet demand for regional market growth and right-sizing capacity on routes with low traffic volumes.
• US Airways - the only non US Airways owned airline selected to operate the Embraer 170, for whom Chautauqua already operate a number of ERJ-145s. Established Republic Airlines as a vehicle to provide these services to gain best possible labour rates and comply with conditions of the US Airways jets-for-jobs agreement with its pilot unions.

The crux of the matter: financial returns

Republic has maintained consistently strong financial performance on the back of strong traffic growth and managed cost environment. Reflecting reducing yields, passenger growth of 35.4% drove revenue growth of 22%, although outstripped by cost growth of 28%. Nevertheless, Republic delivered an operating margin of 17.6% in the first half of 2004, up with the most profitable airlines in the world.

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* contact plane markets for an explanation of the scope clause issue

 

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