Bedford is all too aware that Republic's acquisition of Midwest is being lumped in with failed attempts by regional carriers to launch stand-alone, branded operations from scratch, such as Independence Air and ExpressJet. But he rebuffs: "I can tell you, we have never considered the concept of creating a brand - 'oh let's take Republic and take the current aircraft we have in our portfolio and throw out a schedule, throw out a web booking engine and start flying new service from small town America to small town America'. That's never been of any interest to us".
He also readily admits Republic has no experience in managing a brand. "You know, you're right," he acknowledges. "That's why we're buying the guys that have been doing it for 25 years. They know their brand."
Armed with a strategy for Midwest, Bedford says he and management now need to focus on its execution. "We don't have to worry about what anybody thinks of our plan. If we do a poor job executing it, we'll fail. If we do a good job executing it, we'll succeed. It's literally that simple."
As is typically the case with struggling carriers, both AirTran and Southwest are fast closing in on Milwaukee, hoping to take advantage of Midwest's weakened position. AirTran now has close to a 17% market share in Milwaukee, compared with Midwest's dominant 23% share. Southwest plans to step up the pressure on Midwest in November when it will start competing on flights from Milwaukee to Kansas City, Las Vegas, Orlando, Phoenix and Tampa. Taking this into account Bedford declares: "There's no free lunch here. We think we're in for a real dogfight in Milwaukee and we're ready for it. Game on."
Being a studious observer of the industry, he recognises the business models of AirTran and Southwest are built on growth. "If there aren't any obvious underserved points to grow, then the next best way to do it is to find a struggling carrier and go kill them. But you can also lose a lot of money in that process and I think that's what's happened in Denver [with Southwest and Frontier,]", Bedford says.
© Jim Callaway
DEEP POCKETS
More than any other US regional, Republic has used its financial strength in unprecedented ways to support its partners, and more importantly, tightly secure its own future.
In 2005, Republic brokered a $100 million deal with US Airways, which was exiting Chapter 11. The deal entailed buying 10 Embraer 170s operated by US Airways' now defunct MidAtlantic subsidiary and assuming leases on 18 additional E-Jets. Republic also took on the purchase and lease-back of 124 US Airways slots at Washington National and New York LaGuardia, securing valuable slots tied to its contracts. "I think that was a pretty good move on our part," says Bedford.
During the last year Republic has also loaned US Airways $35 million as part of a larger $950 million financing package. US Airways accounts for 30% of Republic's revenue. Bedford admits that Republic's involvement in these deals originates from self-interest. "Once you ascertain a healthy US Airways or a healthy Delta is important, then you have to figure out ways you can help that ultimately don't jeopardise your business."
Republic applied that rationale again in 2005, when it had the opportunity to take an equity stake in US Airways for $125 million. Republic could have financed the transaction, but Bedford says the team ultimately decided that this type of transaction was not Republic's core business. But he admits those equity participants were "handsomely rewarded". "It's not often you get the chance to turn $125 million into $375 million, which would have been a real game-changer for Republic. And probably if I had to do it over again, we'd make the same decision because it was a significant risk outside our core competency."
Barclays Capital airline analyst Gary Chase says its analysis "suggests that Southwest is losing a significant amount of money in Denver, while Frontier has been profitable year-to-date. Frontier has made substantial progress during its bankruptcy proceedings and currently enjoys a significant revenue advantage over Southwest in Denver markets".
Just weeks before Frontier's planned emergence from Chapter 11,Southwest is attempting to eliminate its competitor and enlarge its Denver footprint by tabling a final offer of $170 million for Frontier, versus Republic's $108 million bid. Bedford believes Southwest is very astute to examine the cost of competing with Frontier which could emerge from Chapter 11 as a formidable competitor. Southwest may be asking itself "is the better option, the more economic option, for us just to buy it?"
At the same time as Republic is working to revitalise Midwest and rival Southwest in the bidding for Frontier, it also recently enlarged its stake in Hawaiian interisland carrier Mokulele Airlines to 89% by injecting just under $20 million in the carrier. Republic's initial intentions were a far cry from owning Mokulele, but the quick adaptation is typical for Bedford and his management team.
At the time Republic partnered with Mokulele, "we were right on the heels of Frontier's bankruptcy and getting 17 aircraft [Embraer 170s] returned to us", he explains. "So we were feeling very motivated to get those aircraft back into operation. Quite frankly, the calculus in how we reviewed some of those options is different to how we would look at it as clean sheet exercise. Certainly, we were not looking to go start-up an inter-island carrier."
It was actually looking to "provide a guy that wanted to start an interisland carrier with competitively-priced capacity and put their capital at risk, not ours", says Bedford. But then "the market went into this severe economic recession, and room nights in Hawaii literally fell off a cliff. So you can't pick a worse time to actually want to start an operation over there". The companies that had previously pledged to commit capital to Mokulele backed out and, as Bedford recounts, "at that point we had a choice, we could just yank the aircraft out of there and write it off or we could just ride out the storm".
In the aftermath, he acknowledges its easy to "take for granted" what network partners do for you. "How hard can it be to get into Orbitz, Expedia and Travelocity," he questions, again offering a laugh. "It turns out it's really hard. "For the larger distributors like Orbitz, Bedford says its tough to spark interest in 2,000 seats in a 20,000-seat market. "It's not a huge return on their programming investment."
Ironically, Bedford says some of its experiences with Mokulele "reinforced the need to buy a brand as opposed to creating a brand." But Mokulele now has distribution agreements with Kayak, Expedia and its pact with Travelocity went live in late July. Bedford says Expedia has been a great partner for Mokulele and "they tell us we're now the number one carrier they book in Hawaii".
Having endured all the strife with Mokulele, Bedford sees the airline gaining momentum in interisland Hawaii. "As it slowly bootstraps to distribution channels, the bookings just really continue to amplify."
He believes
the inter-island Embraer 170 services hit a "sweet spot" by matching the comfort of Hawaiian's 717s and exceeding that of the 50-seat CRJ200s operated by go!, a subsidiary of US regional Mesa. But he stresses Mokulele offers that comfort at a much lower cost than Hawaiian, "but not at a significantly higher cost than Mesa".
Ultimately determining how all these moving parts play into Republic's future is tricky. "Our belief is, and I don't think this is by any way unique or insightful, is the [US] domestic transport model is broken," says Bedford. "One thing is clear: the market is going to continue to evolve, and hopefully we can be on the leading edge of that evolution."