INTERVIEW: Republic chief executive Bryan Bedford

Washington DC
Source:
This story is sourced from Airline Business
Subscribe today »

Republic Airways Holdings chief executive officer Bryan Bedford sits down with coffee in hand at the company's headquarters in Indianapolis after arriving back into town in the early hours from Milwaukee. Today the company is closing on its purchase of Midwest Airlines, which now makes Bedford the chief of Milwaukee's hometown airline. Through this and other acquisitions - including a bid for Denver's low-cost carrier Frontier Airlines- this near-invisible US regional player is firmly staking its claim in the country's domestic market upheaval.

jim callaway 
 © Jim Callaway

It's also a day after Southwest Airlines proclaimed its intent to make a counter bid for Frontier, and Republic's management is digesting the news, as evidenced by the hugely-apologetic Bedford stepping out to take a phone call. Within two days in June Bedford and Republic's executive team propelled the company to unprecedented attention after declaring plans to buy current partner Midwest and former partner, Frontier, upon its emergence from Chapter 11 restructuring. But Bedford seems more abuzz than shaken over Southwest's plans. "This is fun," he says. Keeping coy over Republic's plans to counter the Southwest bid, he simply states: "I'm not going to tell you we put our best offer on the table first."

Whatever the outcome in the battle for Frontier's ownership, Bedford remains focused on ensuring Republic's longevity. "This is not an industry where you can just sit still, and it's an industry that's in a tremendous amount of transition right now." Bedford is attempting to carve out Republic's position in that evolution, leveraging what it does well to create its own role. "That's interesting and that's challenging," he says.

Part of rising to this challenge is recognising new opportunities for US regional operators, which have traditionally brokered feeder contracts with network airlines. But these are evaporating quickly. "It's now become more of a game of market share rather than how we grow the pie. That's a tough change for our segment. As the contracts that we all operate come up for renewal, there will be a slugfest contesting for that business." Attempting to gain an advantage before that slugfest occurs, Republic is taking steps to diversify its business beyond the traditional regional model by buying one well-known US national carrier and striving to secure ownership of another.

It has intimate knowledge of both those brands and has infused each airline with significant financial support. Republic has supplied former partner Frontier with $40 million of debtor-in-possession financing. It is also one of Frontier's largest unsecured creditors, with a $150 million claim against the airline which rejected its air services agreement with Republic through Chapter 11 restructuring.

Although Bedford is bullish on Frontier, highlighting its profitability in the "worst economic cycle we've ever seen", he is also very realistic about Republic's stake in Frontier's reorganisation. Laughing, he says: "Those guys owe us a lot of money."

jim callaway
 © Jim Callaway

TEN YEARS ON

June marked Bedford's 10th anniversary as Republic chief executive. Offering a laugh, he says: "Has it been ten years? I haven't had a job this long in my life."

When he was named chief executive of Chautauqua Airlines, the airline operated Saab 340 and Jetstream 41 aircraft, and claimed US Airways as its lone partner. It was just starting to add 50-seat Embraer ERJ-145s to its fleet.

Reminiscing, Bedford says: "[Back then] we would probably have defined success as getting twenty to thirty 50-seat RJs into the market. A real stretch goal might have been 50 aircraft over the course of 10 years."

Now Chautauqua, Shuttle America and Republic operate more than 200 jets. Bedford says he has a "great, great feeling" about what his team has been able to accomplish over the last 10 years. "By that I mean all of our employees," he notes.

As for the future, Bedford aspires to "be here ten years from now". Joking, he says, "I've got eight kids. I've got to put them through college."

Republic is no stranger to financing. Prior to its purchase of Midwest, Republic loaned it a total of $31 million after it began operating the first of 12 70-seat Embraer 170s from Milwaukee. As Midwest continued to work through its financial restructuring, Republic started initial discussions with Midwest's majority shareholder TPG Capital about a potential acquisition of its partner. This happened during the first quarter, amid the tightest credit markets in history.

Those talks culminated in Republic paying TPG$6 million and the equity firm assuming a $25 million note, convertible to Republic stock. Bedford explains "it's been a real fight" to get Midwest's restructuring accomplished, including working with Boeing to return Midwest's nine remaining 717s and dissolving a feeder contract between Midwest and SkyWest Airlines.

He's also not blind to the challenges Republic faces in turning Midwest around. "As you can imagine, Midwest has gone through a lot of difficulties in the last two years, defending the AirTran takeover, changing hands to TPG, decreasing the size and scope of their business because of the fuel crisis and now selling to us."

Realising Midwest is a scaled-down version of its former self, Bedford believes the carrier has failed to deliver on its brand promise during the last 12 months. "It's been destructive to the brand in Milwaukee. Customers there really want to support Midwest, but the airline has to support the customer too and it has to give them great schedules to the destinations they need to go to conduct business on a year-round basis."

In Bedford's opinion, Midwest "does not have a revenue problem. Midwest produces a strong revenue premium. What they have is a cost problem. What's Republic's forte? We run a great, quality product at a very low price."

Republic has a two-fold plan to tackle these cost problems. By swapping Midwest's nine remaining 717s for a similar number of Embraer 190s,Bedford believes he can deliver "substantial" cost savings for the same number of seats. He adds that the 190 is "exactly the right aircraft" for the off-peak season, when a significant amount of leisure traffic dries up. "What a lot of companies do is serve it seasonally. We're going to serve it year-round. The 190 is going to be a real competitive advantage for us over the winter." Republic plans to phase out the 717s by January.

The second part of Republic's strategy is to re-launch services to prime business destinations. "It's hard to be the carrier of choice if you can't serve the top 35 out of 50 local O&D markets in your hometown marketplace," says Bedford. "Again, Midwest is not delivering on its consumer promise to be the carrier of choice because we don't fly where you want to go, because we can't afford it. Well now we can afford it."

Another key link in rebuilding Midwest's network is service from Milwaukee to Los Angeles. "It's been booking now for five weeks. It's the second best market the company's got, so it hasn't taken the community long to welcome reconnecting the network back. We'll increase that service to two a day in September when Delta pulls their one flight a day out of the market."

Bedford says the rebuilding process is slow, but a shortcut may emerge if Republic is successful in its bid for Frontier. "Rationalising the Frontier network and the Midwest network would allow us to move Airbus A319s into a lot of long-haul, high-density, low-yield markets where it is better suited than an Embraer 190,"he explains.

The total costs to restructure and recapitalise Midwest are likely to reach $35 million. From an operating perspective Midwest is currently profitable, says Bedford. But Republic has advised the market that Midwest is likely to "go back into a loss-making situation for the fall and probably January and February, although we don't think it is significantly loss making". Once Midwest finalises its restructuring in early 2010 Bedford predicts: "We're going to be profitable, strongly profitable, in the second quarter of next year and we'll continue to be profitable thereafter."

But despite these projections, Republic's decision to buy a branded carrier has its detractors, namely Midwest's chief rival in Milwaukee, AirTran. When pressed about Midwest's new owner, AirTran chief executive Bob Fornaro says: "We don't mind competing against a regional carrier which really has never competed in a competitive marketplace. It's a lot different and the track record of those carriers has been very, very poor".

Bedford is all too aware that Republic's acquisition of Midwest is being lumped in with failed attempts by regional carriers to launch stand-alone, branded operations from scratch, such as Independence Air and ExpressJet. But he rebuffs: "I can tell you, we have never considered the concept of creating a brand - 'oh let's take Republic and take the current aircraft we have in our portfolio and throw out a schedule, throw out a web booking engine and start flying new service from small town America to small town America'. That's never been of any interest to us".

He also readily admits Republic has no experience in managing a brand. "You know, you're right," he acknowledges. "That's why we're buying the guys that have been doing it for 25 years. They know their brand."

Armed with a strategy for Midwest, Bedford says he and management now need to focus on its execution. "We don't have to worry about what anybody thinks of our plan. If we do a poor job executing it, we'll fail. If we do a good job executing it, we'll succeed. It's literally that simple."

As is typically the case with struggling carriers, both AirTran and Southwest are fast closing in on Milwaukee, hoping to take advantage of Midwest's weakened position. AirTran now has close to a 17% market share in Milwaukee, compared with Midwest's dominant 23% share. Southwest plans to step up the pressure on Midwest in November when it will start competing on flights from Milwaukee to Kansas City, Las Vegas, Orlando, Phoenix and Tampa. Taking this into account Bedford declares: "There's no free lunch here. We think we're in for a real dogfight in Milwaukee and we're ready for it. Game on."

Being a studious observer of the industry, he recognises the business models of AirTran and Southwest are built on growth. "If there aren't any obvious underserved points to grow, then the next best way to do it is to find a struggling carrier and go kill them. But you can also lose a lot of money in that process and I think that's what's happened in Denver [with Southwest and Frontier,]", Bedford says.

jim callaway
 © Jim Callaway

DEEP POCKETS

More than any other US regional, Republic has used its financial strength in unprecedented ways to support its partners, and more importantly, tightly secure its own future.

In 2005, Republic brokered a $100 million deal with US Airways, which was exiting Chapter 11. The deal entailed buying 10 Embraer 170s operated by US Airways' now defunct MidAtlantic subsidiary and assuming leases on 18 additional E-Jets. Republic also took on the purchase and lease-back of 124 US Airways slots at Washington National and New York LaGuardia, securing valuable slots tied to its contracts. "I think that was a pretty good move on our part," says Bedford.

During the last year Republic has also loaned US Airways $35 million as part of a larger $950 million financing package. US Airways accounts for 30% of Republic's revenue. Bedford admits that Republic's involvement in these deals originates from self-interest. "Once you ascertain a healthy US Airways or a healthy Delta is important, then you have to figure out ways you can help that ultimately don't jeopardise your business."

Republic applied that rationale again in 2005, when it had the opportunity to take an equity stake in US Airways for $125 million. Republic could have financed the transaction, but Bedford says the team ultimately decided that this type of transaction was not Republic's core business. But he admits those equity participants were "handsomely rewarded". "It's not often you get the chance to turn $125 million into $375 million, which would have been a real game-changer for Republic. And probably if I had to do it over again, we'd make the same decision because it was a significant risk outside our core competency."

Barclays Capital airline analyst Gary Chase says its analysis "suggests that Southwest is losing a significant amount of money in Denver, while Frontier has been profitable year-to-date. Frontier has made substantial progress during its bankruptcy proceedings and currently enjoys a significant revenue advantage over Southwest in Denver markets".

Just weeks before Frontier's planned emergence from Chapter 11,Southwest is attempting to eliminate its competitor and enlarge its Denver footprint by tabling a final offer of $170 million for Frontier, versus Republic's $108 million bid. Bedford believes Southwest is very astute to examine the cost of competing with Frontier which could emerge from Chapter 11 as a formidable competitor. Southwest may be asking itself "is the better option, the more economic option, for us just to buy it?"

At the same time as Republic is working to revitalise Midwest and rival Southwest in the bidding for Frontier, it also recently enlarged its stake in Hawaiian interisland carrier Mokulele Airlines to 89% by injecting just under $20 million in the carrier. Republic's initial intentions were a far cry from owning Mokulele, but the quick adaptation is typical for Bedford and his management team.

At the time Republic partnered with Mokulele, "we were right on the heels of Frontier's bankruptcy and getting 17 aircraft [Embraer 170s] returned to us", he explains. "So we were feeling very motivated to get those aircraft back into operation. Quite frankly, the calculus in how we reviewed some of those options is different to how we would look at it as clean sheet exercise. Certainly, we were not looking to go start-up an inter-island carrier."

It was actually looking to "provide a guy that wanted to start an interisland carrier with competitively-priced capacity and put their capital at risk, not ours", says Bedford. But then "the market went into this severe economic recession, and room nights in Hawaii literally fell off a cliff. So you can't pick a worse time to actually want to start an operation over there". The companies that had previously pledged to commit capital to Mokulele backed out and, as Bedford recounts, "at that point we had a choice, we could just yank the aircraft out of there and write it off or we could just ride out the storm".

In the aftermath, he acknowledges its easy to "take for granted" what network partners do for you. "How hard can it be to get into Orbitz, Expedia and Travelocity," he questions, again offering a laugh. "It turns out it's really hard. "For the larger distributors like Orbitz, Bedford says its tough to spark interest in 2,000 seats in a 20,000-seat market. "It's not a huge return on their programming investment."

Ironically, Bedford says some of its experiences with Mokulele "reinforced the need to buy a brand as opposed to creating a brand." But Mokulele now has distribution agreements with Kayak, Expedia and its pact with Travelocity went live in late July. Bedford says Expedia has been a great partner for Mokulele and "they tell us we're now the number one carrier they book in Hawaii".

Having endured all the strife with Mokulele, Bedford sees the airline gaining momentum in interisland Hawaii. "As it slowly bootstraps to distribution channels, the bookings just really continue to amplify."

He believes the inter-island Embraer 170 services hit a "sweet spot" by matching the comfort of Hawaiian's 717s and exceeding that of the 50-seat CRJ200s operated by go!, a subsidiary of US regional Mesa. But he stresses Mokulele offers that comfort at a much lower cost than Hawaiian, "but not at a significantly higher cost than Mesa".

Ultimately determining how all these moving parts play into Republic's future is tricky. "Our belief is, and I don't think this is by any way unique or insightful, is the [US] domestic transport model is broken," says Bedford. "One thing is clear: the market is going to continue to evolve, and hopefully we can be on the leading edge of that evolution."