Frontier Airlines owner Republic Airways Holdings Inc. has been busy whipping the Denver-based airline closer to profitability for the past three years.

But Republic next plans to focus its turnaround efforts on its Chautauqua Airlines unit, a once-profitable fleet of 50-seat jets that has been battered by changing industry economics.

By year’s end, Indianapolis-based Republic wants to wring $40 million to $60 million in annual economic improvements from Chautauqua. Founded 39 years ago in Jamestown, N.Y., Chautauqua is the former puddle-jumping, propeller-plane operation from which Republic Airways Holdings evolved. The unit moved to Indianapolis in the mid-1990s.

In a conference call with analysts Thursday, Republic Airways CEO Bryan Bedford called Chautauqua a “loss maker,” and said 19 of its 73 jets were pulled from service in the first quarter.

“We decided it made more sense to park those jets rather than fly them,” Bedford said.

Some analysts on the call expressed surprise that Bedford had hope for the 50-seat aircraft segment. Rising fuel prices have made them less economical compared with larger, 70-plus-seat aircraft on which carriers can cram more paying passengers.

Airline industry analyst Michael Boyd has long warned of the unsustainable economics of 50-seat jets. He cites in part the upward spike in fuel and maintenance costs.

“It’s not a minor issue. Within the next five years, hundreds of these 37- to 50-seat airliners are going to be heading for the desert and the smelter,” the Colorado-based Boyd wrote recently of the segment.

Bedford said operating and maintenance costs “have just been running away on the small jet” portfolio. Nevertheless, Bedford said he expects to find ways to reduce costs, including working with carriers for which Chautauqua flies to find ways to reduce aircraft idle times and to generate more revenue-producing hours.

“Our challenge is to find the right price point … We still believe there’s a fundamental role for this product in the domestic marketplace,” he said.
 
Where Republic’s regional airline business is doing better is in the 70-seat and larger jets it flies under its Republic Airlines and Shuttle America operations.

Still, analysts pressed Bedford on whether regional airline competitors that have recently filed for bankruptcy reorganization, such as Pinnacle Airlines, might emerge with a cost advantage after restructuring.

Bedford said carriers such as Pinnacle may well become more competitive but through bankruptcy “breach a level of trust” with the major carriers. Post-bankruptcy, they often don’t get as many new contracts with the majors, he said.

Conversely, bankruptcies among the major airlines have hurt regionals to the extent they can use that leverage to get relief on contracts with regional carriers to fly their passengers.

Mergers have been another challenge. There’s talk that Republic customer American Airlines, which is in bankruptcy reorganization, may merge with U.S. Airways, another Republic customer.

Bedford said it was too early to speculate about how that could affect Republic’s regional segment.

Wednesday night, Republic reported first quarter profit of $10.9 million for its regional business, compared with $3.1 million in the same quarter a year earlier.

While revenue in the regional segment fell 5 percent, to $355 million, in the first quarter, Frontier's revenue rose 19 percent, to $342 million.

Frontier narrowed its loss to $21.6 million from a loss of $39 million in first quarter of 2011.

Overall, Republic beat analyst estimates with a loss for the quarter of $7.1 million, or 15 cents per share, versus a loss of $22.4 million, or 46 cents a share, in 2011.

Despite huge improvements with Frontier, “a loss is still a loss,” Bedford said.

Bedford also said Thursday that Republic has hired Barclays Capital to advise it on previously announced plans to sell Frontier or spin it off.

Republic has about 10,000 employees system-wide.