Republic Airways vulnerable to USAirways’ demise: But regional airline likely to grab biz from other carriers

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The possible liquidation of US Airways, a fate perhaps sealed by an employee sickout last month that infuriated passengers, threatens to cause a financial fever at Indianapolis-based Republic Airways Holdings.

Twice-bankrupt US Airways is Republic’s largest customer, amounting to 43 percent of its operating revenue on Sept. 30. Regional carrier Republic flies Embraer jets for US Airways and three other carriers out of Indianapolis and other cities in the eastern United States.

Industry observers say US Airways’ baggage handlers may have doomed once and for all the struggling Virginia-based carrier with a sickout over the Christmas holiday that left passengers stranded without bags and holiday gifts. Even US Airways frequent fliers may be ready to ditch their miles in favor of another carrier, said Clark Orsky, an analyst at KDP Investment Advisors, in Vermont.

“It’s a service business and you’re relying on your customers’ good will,” he said.

Republic executives did not respond to a request to discuss the US Airways situation.

The loss of No. 1 customer US Airways would hurt Republic, but probably not cripple it, analysts said. Operating revenue for the first nine months of 2004 rose 24 percent, to $382 million. Unlike the city’s other carrier, bankrupt ATA Holdings Corp., Republic has been profitable, earning $29.8 million in the first nine months, up 22 percent over the same period in 2003.

Yet Republic already has reserved $3.2 million for unpaid receivables from US Airways.

“Precarious financial situation of partners can lead to volatility of Republic Airways’ once-predictable operating margins,” says a recent report by Calyon Securities analyst Ray Neidl. “As the company’s major partners struggle to address their financial challenges, they have already approached Republic Airways to identify further cost savings.”

Neidl assigned an “add” rating, a step below “buy,” to Republic stock because of its heavy concentration of revenue from US Airways and Delta Airlines. Delta dodged a possible bankruptcy reorganization filing recently by securing concessions from employees.

Analyst Neidl said Republic has prepared for the worst by identifying two other carriers that might want to use the 35 Embraer planes it flies for US Airways.

That prospect has helped keep the market upbeat about Republic. The airline, whose principal operating unit is Chautauqua Airlines, has had to scramble before when losing a customer.

In early 2003, Republic stopped flying for America West Airlines, which snuffed its Columbus, Ohio, hub. Republic used those planes instead for Delta Airlines. It also walked away with $6 million from America West as a result of the termination. Neidl said Republic now owns half its fleet, giving it more breathing room to pursue new partnerships.

“While the risk of US Airways’ liquidating is still a concern over the longer term, we believe that, under that scenario, Republic’s 35 50-seat [regional jets] would be reallocated to other legacy airlines in order for the company to quickly capture market share,” James D. Parker, an analyst at Raymond James & Associates, said in a Dec. 23 report.

Parker reduced his 2005 earnings estimate to $1.85 a share from $1.93, but that’s mainly due to a move by Delta Airlines that eventually should help Republic.

On Dec. 22, Republic announced it would operate 16 larger Embraer jets for Delta Connection that each carry 70 passengers. In return, Delta agreed to cancel an order for eight 50-passenger Embraer jets. Republic’s Chautauqua unit agreed to reduce by 3 percent the compensation it would have received from Delta on the remainder of the contract.

But analysts see sunshine longer term, noting the potential for Republic to earn fatter margins using 70- and 90-seat Embraer jets. Republic already is the only regional carrier to land the 70-seat version, currently for United Airlines.

Parker raised his 2006 earnings-pershare outlook to $2.16 from $1.98, saying Republic is the only regional carrier with significant growth and has a jump with the 70-seat Embraer jets, “which we believe will be the next growth platform for regional airlines.”

Delta amounts to 35 percent of Republic’s operating revenue while American Airlines is 19 percent and United Airlines, 3 percent. Republic flies under fixed-fee contracts with the big airlines, which softens the effect of rising fuel prices and other expenses to the extent Republic maintains good flight performance.

The company’s shares have been trending higher the last three months, from about $9.50 in early October to nearly $14 last week. The company went public last year at $13 a share, raising $58.2 million.

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