Quick Thoughts on Republic’s Bankruptcy

The potential of a bankruptcy filing by Republic Airways has been swirling for months. Previously the motivation was negotiations with its pilots’ union, working towards a compromise to keep the crews working. An agreement was reached on that front and things looked decent enough but yesterday afternoon the company filed for Chapter 11 protection in New York; turns out there is still work to be done. The company filed for reorganization showing $.56 billion in assets and $2.97 billion in liabilities.

Like many other recent bankruptcies this one appears to be about the contracts, but it is not employee deals which the company is going after. Rather, Republic is looking to renegotiate its deals with various vendors  and companies to which it is a supplier. And that’s where this gets interesting. Republic expected Delta Air Lines to kill off the 50-seat RJ flying it was operating through the regional. That didn’t happen. Republic planned on that cut to ensure smooth operation of the rest of its fleet given its shortage in crew. But if Delta doesn’t drop those flights odds of keeping the committed schedule are much, much lower. It seems likely that the bankruptcy could be used to renegotiate or terminate that contract.

Read More: Another setback for Republic Airways

Similarly, Republic is on the hook for 40 Bombardier CSeries aircraft with options on 40 more, a legacy from when Frontier Airlines was included under its umbrella of airlines. Alas, as a regional operator it would need a contract from one of its mainline carriers to operate the type (or go into business on its own a la Independence Air) and scope clause issues pretty much rule that out. The bankruptcy is an opportunity to, once again, kill a contract which would have seen the company saddled with an obligation it simply cannot profit with. When American Airlines filed for bankruptcy it was allowed to move forward with aircraft orders because that was part of its recovery plan. In this case the recovery involves shedding that contract and I expect that the judge will allow the contract to be dropped. It is a setback for Bombardier which looked to be finally moving forward with the CSeries given the recent order from Air Canada. Losing the Republic order would leave Bombardier net 5 positive on firm orders (45 v 40) and net 5 negative if options are included (80 v 75).

Read More: Another setback for Republic Airways

Republic also owes the three major legacy carriers operations under capacity purchase agreements. But part of the plan in approving the contract with its pilots was an expectation that it would be able to renegotiate those contracts to increase its income from the mainline carriers. Those negotiations will be expedited with the filing and could be contentious. Despite record profits the carriers are not keen to increase costs, particularly on things like long-term CPA contracts. As for ongoing operations, things should mostly be as they were for the immediate future. United Airlines issued a statement indicating it expects no change while American and Delta are not yet saying so much, but the company is operating normally, at least for now. Delta has previously indicated it is incredibly flexible in schedule adjustments; we may soon get to see just how well that works in reality with a significant shift if the 50-seaters are dropped.