Republic Airways Holdings CEO Bryan Bedford believes operating dynamics of smaller 50-seat jets need a drastic overhaul in order for regional airlines to operate those aircraft at a profit.
Republic's fellow publicly-traded US regional peers SkyWest and Pinnacle have both cited challenges in meeting last minute scheduling changes in the operations for their major partners, which have created cost pressures for those carriers.
During a recent earnings call Bedford concluded: "it is clear from their third quarter reports that some of our competitors fixed fee agreements aren't producing the financial results that investors have historically enjoyed".
Republic has three wholly-owned regional carriers in its portfolio - Republic Airlines, Shuttle America and Chautauqua. The company also owns Denver-based Frontier Airlines.
Bedford surmised one reason for US regional financial challenges is "our compensation rates have been tied to what has been a very benign CPI [consumer price index] inflator over the last several years. This means that we along with our regional competitors have seen very small increases in our compensation levels from our major airline partners".
As costs at regional airlines increase, "our fixed fee compensation formulas have simply failed to keep pace with our costs increases".
Reiterating the challenges of 50-seat economics in a high fuel cost scenario, and the addition of major US airline consolidation leading to the downsizing of marginal hubs, "you have a recipe for what is likely to be less demand for 50-seat RJs for the industry in the years ahead".
Republic has been working to dwindle its 50-seat operation, said Bedford. To illustrate his point he stated at year-end 2007 Republic operated more than 120 50-seat jets; but during the last few years the company has shed 50 units through subleases or lease returns.
He expects 50-seat jets to account for 20% of Republic's fixed fee revenues in 2012 compared with 50% in 2007.
The bad news, however, is Republic has 32 small jets exiting major carrier contracts during the next three years at a rate of roughly 10 per year, said Bedford.
"It is difficult to see how we can continue to operate these aircraft for our major airline partners unless we can significantly reduce the operating costs," he declared.
Republic is using an airline performance analysis system it recently purchased for its Frontier subsidiary as part of a profit improvement scheme. Bedford cautioned, however, that it is too early to determine the outcome of the restructuring of its 50-seat jet operations.
He explained Republic's scrutiny of the small jets is an attempt to "proactively address the cost and efficiencies of the 50-seat product".