How Does an Airline Go Bankrupt with Fuel This Cheap?

Republic operated E175 jet in American Eagle Livery

Earlier this week Republic Airlines declared bankruptcy stating that a lack of pilots resulted in lost revenue due to grounded flights. Anyone in the travelling public reading this story must be confused as to how an airline can go bankrupt in this time of cheap fuel. After all, planes are jammed full and stories of record profits being set by airlines abound.

To understand all this, it is important to note that Republic isn't a "real" airline in the customary sense. That is, you can't go online and buy a ticket on Republic Airlines. Republic, like most "regional" airlines, is simply a provider of aircraft and crews to their major airline partners. Their aircraft are flown under the banners of American Eagle, United Express, and Delta Connection.

The agreements which bind Republic and other similar airlines to their partners, known as "capacity purchase agreements", delineate the terms under which aircraft and crews are provided to fill the schedules dictated by those major airline partners. Once signed, as with any contract, the terms are set. And again, as with any business contract, there are likely a host of penalties imposed for non-performance of the terms of those contracts. This is all routine business stuff.

Revenue Restricted but Costs Unbound

The regionals, then, are bound on the revenue side of their ledger by the contracts they've signed. They don't get to raise prices on their flying customers because they don't really have any. Their customers are the major airlines with whom they have signed contracts. Passengers are the cargo who incidentally happen to be on the airplane. You can easily see how incentives are aligned for the "enhanced" customer experience that most regional airlines provide.

The only way for a regional airline to increase profit, then, is by reducing costs.

One cost input that most likely wasn't considered highly variable was that of labor, specifically pilots. One of the main reasons the regional airline model even exists is that it functioned as an end run around union contracts at the major airlines. Several decades ago major airline unions (ALPA, APA) allowed loopholes in their contracts allowing their airlines to outsource the operation of smaller aircraft thinking that the amount of flying would remain small.

That was a strategic mistake for the unions as "regional" airlines grew unabated using new fast and capable jets. Regional airline enplanements grew from 27 million passengers in 1985 to about 160 million passengers in 2014 taking a huge bite out of the flying done by the unionized pilots at the major network carriers. The reduced costs from the regional airline operations also allowed the major airlines to field a competitive response to the explosive growth of younger low cost carriers (LCCs), notably Southwest.

The Model Breaks Down

That model more or less worked because younger pilots were willing to accept the low wages offered by the regional carriers in exchange for the flight hours they needed to apply for a job at the major airlines where the money is. In a sense it was a deal with the devil because the existence of the low paying regional jobs came at the expense of the higher paying flying at the majors. It might have been considered an industry wide "B" scale, but the model persisted.

With the crash of Colgan 3407 and the subsequent legislation which raised the minimum hours required for any pilot to work at a regional by five times, the wheels have apparently come off. Any pilot who wishes to work for any commercial airline must now have a minimum of 1500 hours. 

This new requirement has effectively shut down the pipeline for new pilots. As the major airlines now must hire thousands of pilots to replace retiring pilots, the regionals are losing pilots faster than they can be replaced causing them to cancel flights for a lack of pilots.

Republic itself was losing around 40 pilots per month and couldn't cover their schedule. This meant lost revenue. Last year Republic was even sued by Delta for breach of contract in not fulfilling its obligations, the irony being that Delta is hiring away many of Republic's pilots.

A result of the pilot shortage is a bidding war for the fewer pilots remaining available for hire. One need only click over to the Republic corporate home page to see multiple appeals to prospective pilots. For pilots with the requisite number of hours, it's a good time to be looking for a flying job.

As far as the Republic bankruptcy is concerned, this is nothing more than a renegotiation opener by Republic to gain more favorable terms with its major partners while avoiding the penalties in its existing contracts. As the pilot shortage worsens, fares will likely increase and service to smaller cities is likely to be curtailed or ended.

Are We any Safer?

A good way to start a bar fight or internet brawl on a pilot forum is to question the need for the higher hours requirement. It should be noted that both the Colgan pilots far exceeded the new hours requirements. The problem in that crash was identified as a weak captain and fatigue. It should also be noted that the Air Force routinely puts its pilots in the seat of advanced fighter and multiengine heavy transport aircraft with only about 200 hours of experience. I know because I was one of them.

That said, it appears to be highly unlikely that the 1500 hour requirement will be relaxed any time soon. The topic is simply too much of a political hot potato. My guess is that we will see more shrinkage and possible bankruptcies of regional airlines along with major airlines bringing some of that flying in-house in order to keep ahold of their pilots.