Republic Airways on a shopping spree

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Introduction

Republic Airways is led by a talented group of executives. Within the past week they have purchased Midwest and Frontier Airlines. The Frontier deal still needs approval from the Bankruptcy court where their case has been filed. There does not appear to be any other bidders for Frontier in this deal. Frontier declared bankruptcy over a year ago. They have done a remarkable job turning their operation around and are now profitable. That says a lot about an operation when facing stiff competition on their home turf. Denver has three dominant carriers, Frontier, United, and Southwest. This is the smallest market to have three airlines hubbed at its airport. JFK, in New York City, has Delta, JetBlue and American. LAX, in Los Angeles, has American, United and Southwest.

Republic will be forced to operate Frontier and Midwest on a separate certificate to avoid scope clauses in their contracts with other major airlines. Republic now has some serious questions to answer.

Risks:

This is a large integration and a risky venture. Besides taking on a lot of new headaches (mergers are never easy, just ask Doug Parker at US Airways) Republic risks angering their partners. When contracts come up for renewal a major carrier like Continental may choose not to renew their regional flying with Republic because they are now competing on a larger scale with the same company. This could cause Republic some growing pains until the operation is large enough to sustain itself. If these contracts are not renewed it is possible that Republic will be left paying a lot of expensive leases on planes they are unable to fly. This cost can add up fast and may force the company into bankruptcy. Excessive debt is another problem. As we have seen with Mesa Airlines in the past year excessive debt could really down a company fast. If payments can not be made Republic may be forced to settle with the debt holders and risks angering their stock holders.

Mitigating that risk

Republic is in a unique situation. Midwest was already being wound down and was planning on removing their 717's before this deal. Midwest had become a shell of its former self. There are very few people left on staff, so integration should be rather simple from a human resources point of view. Frontier already has the authority to do all the flying Republic will require, so it should be almost as simple as relocating some mainline flying to cover the largest markets Midwest currently serves. In the event that contracts are not renewed Republic has a few places it can place airplanes. Its joint venture in Hawaii is one place they can go besides the new integrated Frontier/Midwest operation. These two options should allow enough growth to mitigate any risk Republic will run by angering their other partners.

What do you do with the Midwest operation?

The 717's are all leaving, to be replaced by Republic EMB-190's. Midwest was on path to become a shell for Republic to deploy some assets as they came off contract from other carriers. Regional Jets are at a cost disadvantage when compared to the other airlines' larger, mainline fleets. Southwest is moving into Milwaukee and will pose formidable competition for Midwest.

What do you do with the Frontier operation?

Frontier has a lot of competition in Denver, which is their only hub. Southwest has grown exponentially since entering the market, and United is still a formidable opponent that will continue to defend their turf. Frontier has turned their operation around in the past year, and is currently making a profit. They have taken some great steps with ancillary revenue and have a strong management team in place.

My expectations

If I was in charge of this integration I would take the following steps:

1) Execute an immediate code-sharing agreement between Midwest and Frontier. Use this to cross promote flights and market services for both airlines across the newly formed system.

2) Distribute the larger aircraft (A320 Series) to biggest markets. This will ensure the best return for the airline and will help Republic begin to grow and integrate the network. While redistributing the A320 series planes, reduce unprofitable service from Denver, Milwaukee, and Kansas City. Use this opportunity to right size the fleet and services. There is a possibility here of reducing Kansas City to a focus city or just a spoke.

3) Merge the airlines under one brand. Use one certificate to manage all of this flying and use the extra certificate to obtain new code-share agreements with other airlines. This will help them avoid more scope clause issues and put more planes into service. Use this time to implement the best features from the separate airlines across the system, while getting rid of the worst attributes. This will help the new airline gain notoriety as customer focused and a good value for the customers money. It will also help the new airline be profitable and compete successfully in a difficult market.

4) Introduce new flights to destinations already served by either airline. This will increase productivity and open new markets for both airlines. Also be sure to increase service between hubs in order to increase connectivity.

5) Grow the Denver and Milwaukee market to obtain proper economies of scale in order to better compete with the major airlines. Use this opportunity to open new markets and solidify their position in their current markets. This is a perfect time to create good connectivity from between the coasts. With two well positioned hubs, in Denver and Milwaukee, the new airline should be able to compete with the other majors.

6) Open a new hub on the East Coast to grow their operation and become a national airline. As the airline becomes larger it will be less susceptible to competition from new entrants in a market. It will also give them the economics to reduce their Cost per Available Seat Mile. By spreading their fixed costs across more seats and more markets the airline will be profitable at lower prices and be able to gain market share with reduced prices.

Conclusions

This plan will take many years to implement and it will not be an easy road. Republic is in a unique position to capitalize on a down market. They are getting two airlines at fantastic prices because of the economic troubles in the world. If Republic commits to their plan (whichever plan they choose) and it works the company stands to make a great deal of profit. If the new airline can remain profitable for a short time Republic might even be able to spin them off in an IPO and make some serious cash in a short amount of time.

Republic is one of the largest and best run regional airlines in the country. I am very excited to see how they compete with the majors. These large, national airlines will defend turf harshly. They do not want new entrants making inroads to their markets. We have entered a new era of aviation, where regional airlines are expanding their reach and operations. Republic is on the leading edge of the market and will be the guinea pig for the new airline industry.