Republic Airways Makes Two Deals: Is It Missing the Big One?

Regional airline operator Republic Airways (NASDAQ: RJET  ) has been focused on three goals this year: selling or spinning its Frontier Airlines subsidiary; winning new fixed-fee contracts from the network airlines; and sealing competitive labor agreements with its employees.

The Frontier sale has been delayed several times, although management has suggested that it may be resolved within a few weeks. The contest for new fixed-fee contracts has been a mixed bag: without signed labor agreements, Republic has trouble making competitive bids. Republic did win a big contract from AMR (NASDAQOTH: AAMRQ  ) recently, but other major contracts have gone to top competitor SkyWest (NASDAQ: SKYW  ) .

Achieving the third goal -- reaching competitive labor agreements -- is thus doubly important. Fortunately for shareholders, Republic has started to make significant progress. In the past two weeks, it has announced two new tentative agreements, covering Republic's dispatchers and flight attendants. Yet Republic still has not come to an agreement with its largest and (arguably) most important labor group: its regional airline pilots.

New deals
Both of the recently announced tentative labor agreements have five-year terms. Both agreements still need to be ratified by the union membership; assuming that happens, they will provide greater cost certainty for Republic.

The flight attendant agreement was particularly important, because it covers more than 2,000 workers (whereas there are fewer than 100 dispatchers). The previous flight attendant agreement became amendable in 2009, meaning that a new contract was long overdue. This could cause some moderate cost inflation, but the company has stated that the economics of the agreement will allow Republic to remain cost-competitive.

The big one: still missing
Unfortunately, the most important deal -- covering Republic's more than 2,300 regional jet and turboprop pilots -- is nowhere in sight. In late February, management told investors that it had made a "best and final offer" to the pilot union's negotiators, but that offer had been rejected.

There was a brief hope that the union's national leadership would organize a vote among the Republic pilots concerning the company's final offer. However, based on comments made by management on the most recent earnings conference call (in late April), that vote never took place. The National Mediation Board -- which supervises labor negotiations in the airline industry -- has stated that it has no plans to convene further negotiating sessions in the near future. In other words, the airline and its pilot union appear to have reached an impasse.

This could put Republic at a disadvantage if other regional flying contracts go out for bid in the near future. While regional pilots tend to earn much less than mainline pilots, they still constitute the highest compensated labor group. Without a deal in place, Republic does not know what its future labor costs will be. Republic is rightly wary of locking itself into long-term fixed-fee agreements without this cost clarity; however, this may allow competitors like SkyWest to gain market share.

Work to be done
Republic has reached tentative agreements for two new labor contracts in the past two weeks. This is a positive step for the company in terms of achieving cost certainty. However, there is still a lot of work to be done. Not only does Republic still need to complete the Frontier separation, it also needs to wrap up a deal with its pilots. Only then will it be well-positioned to take advantage of the growth opportunities inherent in the industry shift toward large regional jets.

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