Republic Airways Holdings Inc. Could Benefit From Bombardier's Woes

Last week, Bombardier (TSX: BBD.B  ) announced that the launch of its long-awaited CSeries jets will be delayed by about 1 year. The CSeries jets were originally supposed to enter service in 2013, but that had already been pushed back to late 2014. Now, Bombardier does not expect to make its first CSeries delivery until the second half of 2015.

Republic Airways Holdings (NASDAQ: RJET  ) is Bombardier's largest customer to date for the CSeries jets, with 40 firm orders and 40 options. Typically, that would make it the biggest loser from a delayed delivery schedule. Yet paradoxically, Republic Airways will probably be better off now that Bombardier has been forced to delay the delivery schedule again.

More trouble getting off the ground
In recent years, Bombardier has been one of the two main players in the regional aircraft market. The CSeries is its first attempt to break into the mainline market, which is dominated by Boeing and Airbus. Yet it has not been especially successful so far; Bombardier currently has fewer than 200 firm CSeries orders.

Bombardier's CSeries jet has not been a hit so far (Photo: Bombardier)

As a "clean-sheet" design, Bombardier's CSeries jets are expected to be more fuel efficient than direct competitors. However, airlines increasingly prefer larger aircraft like Boeing's 737-800 and 737-900ER and Airbus' A320 and A321 over aircraft in the 100-149 seat size range like the CSeries. Additionally, airlines that already operate the larger 737 and A320 family aircraft have an incentive to stick with Boeing and Airbus for smaller narrowbodies as well, in order to simplify maintenance and pilot training.

Lastly, many airlines -- including Republic Airways -- are worried about the risks of committing to an unproven airplane. The recently announced delay in the delivery schedule could give even more potential customers cold feet as they worry about Bombardier's reliability. Furthermore, leasing companies and financing sources may hesitate to commit to a seemingly unpopular jet.

A potential complication
Bombardier's latest setback could be a blessing in disguise for Republic Airways. Quite frankly, the CSeries jet does not fit into Republic's current business model, and so the company's large CSeries order entails disproportionate risk compared to the potential reward.

Republic's core business involves flying regional aircraft for the 3 big U.S. legacy carriers. This business model is attractive for two reasons. First, Republic is paid on a "fixed-fee" basis and is not exposed to cyclical swings in air travel demand. Second, Republic passes through its fuel costs to its major airline partners, and therefore has no exposure to fuel price swings.

Republic just sold its Frontier Airlines subsidiary late last year in order to refocus on this core regional airline business. Yet the CSeries order could draw Republic back into the competitive mainline business. The legacy carriers all have agreements with their pilot unions preventing them from outsourcing flying on planes with more than 80 seats or so.

Republic CEO Bryan Bedford has previously suggested that the CSeries jets could be operated as a low-cost carrier within one of the global airline alliances, though the company has not unveiled any firm plans. In any case, flying the CSeries jets will require a risky deviation from Republic's current business model.

Balance sheet risk
Republic's big CSeries order also poses a significant risk to the company's balance sheet. The company had previously expected to start taking delivery of the CSeries jet in early 2015. With the smaller CS100 jet now targeted for entry into service in the second half of 2015, the larger CS300 model that Republic ordered is expected to enter service in early 2016.

This will automatically defer a significant amount of capital spending for Republic. As of November, Republic had $2.7 billion in committed aircraft expenditures for the 2015-2017 period, the vast majority of which related to the CSeries order. Nearly $900 million of that total was due in 2015.

This is an incredibly high level of capital commitments for a company that is expected to have revenue of just $1.5 billion and a single-digit profit margin this year. Delaying this spending by a year will help Republic rebuild its balance sheet a bit following planned 2014 aircraft spending of more than $600 million.

Furthermore, if Republic decides that it doesn't want the CSeries aircraft after all, Bombardier's delivery delays will likely make it easier for the company to cancel its order. (The exact terms of the purchase agreement are not public.) At the very least, Republic is likely to receive some compensation from Bombardier for the delays.

Foolish bottom line
Bombardier's recent announcement that its CSeries aircraft will be delayed until the second half of 2015 is a significant setback for the company. It will probably have to provide some compensation to CSeries customers, while development costs will continue to pile up.

However, for Republic Airways -- the largest CSeries customer to date -- these delays are good news. The company now has an easier escape route if it doesn't want to take the risk of starting a new low-cost carrier operation. Even if it does keep its CSeries order, Republic will have an extra year to rebuild its balance sheet and grow its earnings before having to finance the CSeries planes.

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