This Company Can Survive the Regional Airline Carnage

In the midst of massive upheaval in the regional airline industry, Republic Airways remains solidly profitable.

Mar 3, 2014 at 10:38AM

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.

One incredible stock for your portfolio
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Adam Levine-Weinberg owns shares of Republic Airways Holdings and is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers