Wednesday, September 16, 2015

Republic’s Feud With Pilots Union Highlights Industry Strains • Regional airlines grapple with pilot shortage, major carriers’ cuts in flights to smaller airports

The Wall Street Journal
Sept. 16, 2015 7:20 p.m. ET

The worsening feud between Republic Airways Holdings Inc. and its pilots union highlights strains across the U.S. regional-airline industry, which is contending with a sudden pilot shortage just as business is being crimped by major carriers reducing commuter flights to some smaller airports.

Regional carriers, while far less well known than big mainline airlines, are enormously important to U.S. fliers. They carried 157 million passengers in 2013, the latest statistic available from their trade association, and were the sole source of flights at 431 U.S. airports.

Indianapolis-based Republic, the nation’s second-largest regional carrier by passengers, employs 242 planes to operate more than 1,200 flights a day on behalf of American Airlines Group Inc., United Continental Holdings Inc. and Delta Air Lines Inc. Republic has warned its 2,100 pilots that it could file for bankruptcy-court reorganization unless they accept a new contract that would significantly raise pilot pay—but not by as much as the union wants.

“Getting to a consensual agreement with the pilots is the best outcome,” Republic Chief Executive Bryan Bedford said in an interview. “But if we just can’t get there, at some point we have to surrender to that reality and go down a different path.”

The union, while sympathetic to the broader problems facing Republic, also argues that the airline reneged on some provisional agreements and flouted protocol by bringing its latest offer directly to pilots. Thus, the union declined to put it out to a membership vote.

The two sides Wednesday were called to meet with the National Mediation Board, the federal agency that oversees labor talks in the airline industry and is mediating the dispute.

The regional industry has encountered serious challenges in the past several years, as six major carriers combined into three and sought better deals from their regional partners. Regional carriers also underwent a spate of acquisitions, as well as some bankruptcies and one shutdown.

Then in 2013 came new federal rules requiring pilots to have many more hours in their logbooks before they can be hired as commercial aviators. That change, which sharply increased the time and expense for budding pilots to land jobs, has crimped the already-tight supply of would-be pilots, who tend to enter the industry through jobs at regional carriers.

In early 2014, new regulations governing pilots’ flight, duty and rest rules came into force, which forced airlines to further boost staffing.

“The old regional model isn’t working anymore,” said Marc Anderson, lawyer for the International Brotherhood of Teamsters local that represents Republic’s aviators. “Carriers are having extreme difficulty filling their [new-hire pilot training] classes. They can’t cover their schedules.”

The pilots understand the airline is losing “a drastic number” to attrition, he said. “We don’t want to put Republic in the ground.”

At the same time, the major airlines are trying to minimize the amount of regional flying they contract for and want fewer flights with larger regional jets, he said. Some, like Delta, have proposed bringing some of that activity in-house.

In response, Republic, like its rivals, is racing to revamp its fleet, paring the number of 50-seat aircraft in its fleet and upgrading to 70- and 76-seaters, which are more pleasing to fliers, more cost-efficient to operate, and essentially make more pilots available in this time of shortage.

Mr. Bedford, Republic’s CEO since 1999, became dissatisfied with the fortunes of the regional business. So in 2009, he diversified by acquiring and combining two mainline carriers, Midwest Airlines of Milwaukee and Frontier Airlines of Denver, making a risky bet that discount airlines would do well as the industry consolidated.

But by late 2011, the move looked like a flop because airlines were still suffering from the economic downturn and oil prices spiked. “That put a significant headwind in the plan,” said Mr. Bedford. Republic in 2013 sold Frontier to a private-equity firm for $145 million—putting Mr. Bedford firmly back in the regional game, just in time for more turmoil.

Republic now can’t meet its schedule for major customers because it is losing so many pilots to other airlines and its recruitment pipeline has dried up because of the low pay in its existing pilot contract, which it hasn’t been updated in eight years.

So far, American, United, and Delta have allowed Republic to reduce its schedules through the fourth quarter, but people familiar with the matter said it’s not clear how much longer they will continue to go along. In most contracts, the majors can impose financial penalties for failure to perform and even cancel a regional agreement.

United said it continues to work with Republic and its other commuter partners to minimize any impact on the airline and its customers, declining further comment. Delta said it is continually in touch with Republic and all of its regional partners. American called Republic a “valued, longtime” partner and said it will continue to work with the company should additional schedule adjustments be needed.

Mr. Bedford said Republic estimates that by year end, it will be 200 fully qualified pilots short of its needs.

Spooked by the uncertainty, investors have dumped Republic stock. From nearly $15 each in February, its shares plunged to a closing low of $2.12 in late August before recovering somewhat. They rose 7.1% Wednesday to $3.45 each.

Mr. Bedford said the company’s latest plight “is not being driven by a financial squeeze or lack of liquidity.” But the pilot recruitment and retention problem cannot continue indefinitely without risking the long-term health of the airline, he said.

He said Republic’s next-to-last offer in June would have raised its incremental pilot costs by about $130 million over three years. He claimed the Teamsters countered with a plan that would boost incremental pilot costs by $1.2 billion over three years.

Mr. Anderson, the Teamster lawyer, said the union’s latest counter, which it hopes the company will entertain, would raise pilot costs by an incremental $150 million over three years.

On Wednesday, the Teamsters met with National Mediation Board mediators for several hours to explain their counterproposal, Mr. Anderson, their local’s lawyer said.

Republic was expected to meet separately with the mediators later Monday. Republic officials weren’t immediately available to comment. A mediation board spokeswoman said the agency doesn’t comment on pending cases.

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