For quite some time now, Republic Airways Holdings Inc. , the parent company of Republic Airlines and Shuttle America, has been struggling on grounds of pilot shortage and pay-related issues. The regional carrier has finally given in to the pressure, seeking bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. The news naturally disappointed investors. Consequently, shares of the regional carrier plummeted more than 70% in after-market trading on Feb 25.
The carrier, plagued by a dearth of pilots, has seen its revenues dwindling in the recent past. The filed Chapter 11 petition listed $3.56 billion in assets and $2.97 billion in liabilities, according to a report in the Associated Press. The regional carrier, which operates multiple flights daily, under its agreements with American Airlines Group (AAL - Free Report) , Delta Air Lines (DAL - Free Report) and United Continental Holdings (UAL - Free Report) , said that it will continue its daily operations without any interruption during the restructuring process.
We remind investors that the Indianapolis-based carrier had warned of filing for Chapter 11 bankruptcy protection in Aug 2015 when involved in a tussle with its pilots regarding their pay. The new deal was accepted by the pilots in Oct 2015, raising hopes that the airline will not file for bankruptcy protection even if pilot shortages remained. However, yesterday’s action was the last nail in the coffin of such hopes.
Pilot Shortage: A Bane for Regional Carriers
Carriers in the regional airline space in the U.S. have been struggling to hire new pilots as they offer low pays compared to the bigger and more illustrious legacy carriers. As regional carriers are financially less rewarding, it is natural for new pilots to be attracted to the legacy carriers who, owing to their financial strength, easily offer more lucrative compensation packages and benefits. This holds good even when it comes to luring experienced pilots away from regional carriers.
Moreover, the stringent pilot training regulations introduced a few years back have hit the regional airline industry in the U.S. hard as the cost of training pilots has gone up significantly, thanks to the fresh regulations. With new pilots difficult to hire and an increase in the number of retiring pilots, no wonder regional carriers are crippled by pilot shortages.
The bigger airlines, which are in the pink of financial health at the moment, courtesy low oil prices, are also looking to fly bigger planes. This will mean cutting down on the contracted regional flights to reduce their dependence on the latter. This practice too is turning out to be a death knell for regional carriers.
Will Pilot Shortage Hit SkyWest Too?
Now that Republic Airways has sought bankruptcy protection, the question that naturally arises is whether other regional players will follow suit? Republic Airways’ main rival in the regional industry, SkyWest Inc. (SKYW - Free Report) , saw a dismal start to 2016 as its shares shed more than 16% in January. Due to the reasons mentioned above, pilot shortage is a problem that affects not only Republic Airways but the entire regional airline industry. SkyWest, which is not highly unionized, is in a better shape than its beleaguered rival, though it is not totally immune to the problem of pilot shortfall.
SkyWest, which performed dismally in 2014, is witnessing a turnaround as its efforts to streamline its business are bearing fruit. SkyWest has been striving to optimize its fleet size. For example, in the third quarter of 2015, SkyWest placed a firm order to the Brazil-based Embraer SA (ERJ - Free Report) for 18 E175 jets.
The fact that the St. George, Utah-based carrier is heading toward improvement is evident from the fact that it has delivered higher-than-expected earnings in each of the four quarters of 2015. Consequently, it is unlikely that SkyWest will follow Republic Airways’ footsteps. However, we expect investors to stay tuned for updates regarding this burning issue.
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