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Republic moves to diversify

US regional operator Republic Airways is moving swiftly to insulate itself from dwindling opportunities in the country's regional market through its proposed acquisitions of Frontier and Midwest Airlines.

Once the agreements are finalised Republic will spilt its business model between being a regional wholesaler and outright owner of two national airlines.

Indianapolis-based Republic revealed its intentions to buy one current and former partner over the span of two days in late June, essentially gaining major footholds in Frontier and Midwest hubs in Denver and Milwaukee.

"Republic, in our view, is changing its business model due to the lack of organic growth in the regional sector and substantial counterparty risk with some of its legacy customers," says Raymond James analyst Jim Parker.

But risks associated with those deals include competing with its existing partner United in Denver and "low cost carriers with significantly greater financial strength - Southwest and AirTran", Parker warns. Both those carriers are going on the offensive in Midwest's Milwaukee hub.

Republic vice-president of marketing, planning and scheduling Jeffrey Jones recently said the company has spoken to United, and that it is not concerned that Republic's relationship with its major partner -which accounts for roughly a quarter of its revenue -will be affected by its purchase of Frontier. Echoing similar comments of Republic chairman Bryan Bedford, Jones says someone will step in to sponsor Frontier's exit from bankruptcy "whether it's us or not".

With Midwest, Republic obtains the largest marketshare in Milwaukee of roughly 25% based on the latest Department of Transportation statistics. But AirTran, which has a 16% market share in Milwaukee, has aggressively been building the market into a focus city. At the same time Southwest is mounting competition against Midwest beginning in November on flights from Milwaukee to five markets - Kansas City, Missouri, Las Vegas, Orlando, Phoenix and Tampa Bay.

But Republic appears to have a two-pronged strategy in Milwaukee, using smaller 37 to 50-seat jets to connect to smaller markets, while replacing Midwest's remaining nine Boeing 717s with Embraer 190s for "more economical 100-seat lift", says Bedford.

Both Frontier and Midwest will retain their brands and operate as wholly-owned subsidiaries of Republic, with Bedford taking the helm as chief executive officer of Midwest upon the retirement of current chief Tim Hoeksema.

As Republic develops an overall strategy for its potential acquisitions, Jones says the company could examine how to ultimately link Frontier and Midwest with its Hawaiian partner Mokuele Airlines. Republic took a stake in Mokulele earlier this year after converting an existing loan into equity in the carrier. Jones says a possibility is the launch of service by Frontier to Hawaii, but "with all this, we'll look at how to tie into Mokulele but that is maybe a bit of a stretch".

Republic expects to firm up its purchase of Midwest in the coming weeks, while the bankruptcy court overseeing Frontier's restructuring has endorsed its acquisition by Republic. If no bidders step forward offering a better deal during a required auction process, Republic should become Frontier's new owner upon its expected exit from Chapter 11 this autumn.

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