Air Transport World

Republic: back from the brink; cost saving labor agreements, new marketing strategy, rationalization of hub system point toward a solid recovery.

Republic: back from the brink

The sense one gets here at Republic Airlines' headquarters is of the relief of a condemned man who has been granted a reprieve but not yet a full pardon. Contrary to recent fears, Republic is not about to die. However, its long-term survival depends on how well it uses the grace period it has been granted.

As President and Chief Operating Officer Stephen M. Wolf puts it: "We're no longer lost in the middle of the forest with no idea of what direction to head toward. But we still have 125 miles to go in order to get clear.'

Republic's reprieve came from its six unions, which agreed to wage and other concessions that are expected to save about $100 million a year as long as they are in force, in return for stock ownership, profit-sharing and a seat on the board of directors. This will give management the breathing space it needs to realize the benefits of the new strategies it has set in motion. These include a streamlining of the route system, cutting down on the number of hubs while increasing Republic's presence at the remaining hubs, and a stronger appeal to the frequent traveler.

The airline's financial history since deregulation has been, to put it gently, disappointing. Formed in 1979 by the merger of two regional carriers--highly successful North Central with Southern Airways--and augmented by the acquisition in October 1980 of Hughes Airwest, the new airline--renamed Republic to reflect its broader reach--went into heavy debt to finance the merger and acquisition. So, although it managed to produce operating profits each year until 1983, when it suffered an operating loss of $31 million, interest on the debt has consistently pushed Republic's head under water; 1979 was the last year to show a net profit. Between 1980 and 1983, net losses totaled $222 million, almost exactly half the loss coming in 1983. The airline was worth less than it owed.

Factors in turnaround

The scales finally appeared to be tipping toward profitability by the second quarter of 1984. For the nine months ended September 30, operating profit was $90.7 million, compared with a $58.3 million operating loss in the 1983 period. Net profit was $39.5 million, compared with a net loss of $115.1 million in 1983. The most significant factors in the turnaround were a $68.7 million decrease in labor expenses, a $64.5 million increase in operating revenues (due mainly to a sharp jump in yield, which more than compensated for a drop in traffic), a $20 million drop in fuel cost, and a $17.6 million gain on the disposition of equipment.

Republic's annual report, issued in February 1984, carried this ominous qualification from the auditors: "Significant uncertainties, which include the obtaining of employee wage and other concessions, could cause the company to be unable to continue in business.' Concessions were nothing new to Republic's unions; they had agreed to various givebacks in previous years, but only for short terms. By August 28, 1984, all six unions had agreed to the new concessions management said were necessary for survival, to remain in effect for at least two-three years. Satisfied, the auditors withdrew their cautionary qualification in a revised report in December.

The banks too lent a helping hand. Worried about a default on the $340 million balance of their revolving credit agreement with the airline, they had been waiving month by month certain covenants relating to debt/equity ratios and cash in order to allow Republic to remain afloat. In August they liberalized the restrictions. When ATW interviewed Wolf in December he was optimistic that they would soon lift their ban on further capital expenditures by the airline. …

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