This Company Can Survive the Regional Airline Carnage

Regional airlines are under immense pressure today. Legacy carriers have become less and less interested in hiring regional airlines to fly fuel-guzzling 50-seat regional jets. Meanwhile, new pilot training rules and high demand for new pilots at larger carriers have made it extremely hard for regional airlines to attract and retain qualified pilots at their traditional meager wage rates.

Top regional airline SkyWest (NASDAQ: SKYW  ) has already projected a Q1 loss due to these issues as well as an unprecedented number of weather-related cancellations in the first two months of 2014. The company's ExpressJet subsidiary -- which flies lots of 50-seat jets -- is expected to post another big loss this year. Overall, analysts expect SkyWest's EPS to decline by a third in 2014.

Heavy reliance on 50-seat jets is dragging down SkyWest's earnings.

Smaller regional airlines are in even worse shape. For example, Great Lakes Airlines has had to cut its schedule drastically due to a severe pilot shortage. However, one regional airline is in better shape than any of the others due to its comparatively low exposure to 50-seat jets: Republic Airways (NASDAQ: RJET  ) .

A different model
Today, Republic Airways has approximately 248 aircraft in its operating fleet. Of those planes, 68 are the small regional jets that are rapidly going out of style. However, the vast majority of Republic's planes are larger regional jets that seat 70-80 passengers. Republic has 147 of these aircraft. The rest of the fleet is made up of 28 large turboprops and 5 99-seat jets used for charter service.

Unlike 50-seat regional jets, larger regional jets -- and to a lesser extent, large turboprops -- are as popular as ever with the legacy carriers. These aircraft have enough space for first-class and premium economy sections, which bring in extra revenue, but are much cheaper to operate than mainline aircraft on a per-trip basis.

Under pressure
While Republic is better positioned than competitors from a fleet-mix perspective, that does not mean it's immune to the ongoing crisis in the regional airline industry. Like other regional airlines, Republic has had trouble hiring and retaining pilots due to the increasing demand for qualified pilots at mainline carriers and Republic's comparatively low wages.

Republic has been trying to address the wage part of the equation, but for most of 2013, contract negotiations between Republic and its pilot union were stalled. However, the two sides reached a tentative agreement last month that is expected to significantly improve pilot pay. Pilots will vote on the agreement this month. If they ratify it, Republic will be better able to attract and retain good pilots.

In the meantime, Republic has had to cut back its small regional jet flying due to a shortage of pilots. Last month, the company notified investors that it would remove 27 of its 44 and 50-seat jets from service this year. This will free up pilot labor for the scheduled growth in its profitable 76-seat regional jet flying for American Airlines (NASDAQ: AAL  ) .

Republic now flies large regional jets for American Airlines. Photo: Republic Airways.

As a result, Republic will end all of its small regional jet flying for American and United Continental (NYSE: UAL  ) by mid-August. Even though this flying barely breaks even, parking these planes will depress Republic's 2014 pre-tax income by around $18 million, since the company is still responsible for the ownership costs for these aircraft.

Managing the headwinds
All things considered, Republic is managing the regional airline industry's headwinds very well. The company expects to be solidly profitable this quarter, unlike top rival SkyWest, although it has also had to cancel thousands of flights due to winter weather. For the full year, Republic expects EPS of $0.90-$1.20. This compares to EPS from continuing operations of $0.92 last year, or approximately $1.16 excluding a one-time impairment charge.

While this implies that Republic's adjusted earnings are likely to decline, at the midpoint of the guidance range it's a very modest 10% decline. That includes three significant negative impacts: the cost of heavy flight cancellations in January and February; the cost of taking 27 small regional jets out of service; and the cost of significantly raising pilot pay.

Republic also has an opportunity to mitigate some of these expenses. CEO Bryan Bedford told analysts last week that there was a possibility that Republic could get rid of up to 15 small regional jets this year -- either by selling or by subleasing them. Additionally, if the new pilot agreement improves Republic's ability to hire pilots, the company may be able to put a few idled small regional jets back into service.

Foolish bottom line
As one of the regional airlines with the lowest exposures to small regional jets, Republic is well-positioned within an admittedly troubled sector. Despite all of the headwinds it faces this year, Republic's earnings will only decline marginally in the most likely scenario. Furthermore, Republic Airways stock trades for just nine times the midpoint of its EPS guidance.

Whereas SkyWest is coping with big losses in its ExpressJet division and many smaller regional airlines are in even more dire straits, Republic Airways will remain solidly profitable during this period of transition in the regional airline industry. If competitors falter, Republic may see new growth opportunities fall into its lap in the coming years.

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Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 03, 2014, at 2:08 PM, Inspectigator wrote:

    The proposed top Captain pay on the Embraer-190 is higher than the top pay on the E190 at American Airlines/USAir. But a new-hire pilot still starts at around $23k/yr, and pay goes up slowly for the next nine years. So their costs are going up more than the mainline that is paying them to fly their routes, and they still can't attract new pilots, as nobody is going to school to become a pilot for that low pay. There are no new pilots. They will have to offer enough pay to attract pilots from other airlines, and a few dollars per hour won't do it.

    The mainlines pay the regionals to fly, and that pay is not based on profits, it is based on overall benefit to the major airline's network and labor relations. Ticket prices, especially to/from small markets, are about to go up dramatically as regional airlines continue to park airplanes they can't staff. Those high ticket prices will mean high profits, for the mainlines who sell the tickets. A bidding war for regional lift is probable, so regional airlines will probably see some of that profit, briefly. The majors will certainly take back flying they can do as cheaply with their new pilots hired from the regionals.

    American Airlines owns those E-190 mentioned in the article, and they shopped them around to each regional, using the offer to extract concessions from unions. Republic pilots gave concessions to get this contract, after American Eagle pilots turned them down. Pilots don't view this new contract as making Republic more desirable to work for, quite the opposite. They view this as lowering the attractiveness of the career for new pilots.

  • Report this Comment On March 12, 2014, at 9:54 PM, HugoS wrote:

    #1 and most important - Republic pilots have not accepted the TA. Reccent polls have shown that 93 percent disaprove of it. It is unlikely to pass. All of the above conjecture is just that.

    #2 Republic does not operate E190's for any mainline carrier. The few 190's they have are being flown for charter operations.

    #3 American Eagle pilots have not voted down anything yet, their voting ends the end of March as does voting for Republic.

    Republic is desperately trying to convey a message of hope to it's share holders but with the concessionary language of the illegally negotiated TA - there is little hope to be found.

    Brian Bedford, current CEO of Republic, is in position for a hard learned lesson on ethics.

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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