The airline industry, like most others, goes through regular cycles. The problem comes when management fails to recognize the difference between an ebb in business and the results of a failing business plan.
That was the problem Bryan Bedford faced when he joined Republic Airways Holdings Inc. in 1999.
“The predecessor management team thought it was doing all the right things and that they were going through the typical cycle that airlines go through in terms of losing money, and sooner or later they’d start making money again,” says Bedford, chairman, president and CEO of the company. “You have to be realistic. There’s never a good time to lose money. If that market can’t perform, you have to be honest about your ability to add value to the market, and if you can’t get fair compensation for the service that you’re providing, then you need to exit the market.”
The previous management wouldn’t exit money-losing markets. But that wasn’t the only problem. Bedford’s approach was to quickly stabilize the company and restructure the business model while earning the trust of employees and rekindling their passion for the business.
“Going into 1999, two things were happening,” Bedford says. “One, the company had just executed a new union contract with its pilots that changed dramatically the way that the pilots would schedule their work for the company. That process put the company into a significant crew bind.”
Flight crews were suddenly in the wrong places, which led to poor reliability, and the company wasn’t able to complete some flights, which made customers and its one airline partner, U.S. Airways, unhappy.
“Moving into the back half of 1999, we were faced with two things,” Bedford says. “One was Y2K. And the second is what we can now look back on and see the beginning of the initial recession going into 1999, 2000. Revenues were already starting to deteriorate, yet costs were increasing by virtue of the new pilot agreement and the fact that the company had to play catch-up on its Y2K compliance.”
Bedford took an honest look at the situation, something previous administrators were unable to do.
“No matter how bad you think it is, it’s always worse,” Bedford says. “Make sure you’re not looking through the rose-colored glasses.”
As if those problems didn’t pose enough of a challenge, Bedford recognized that the company’s basic business model — flying turboprop planes in and out of small-town America — was destined to fail. So he chose to restructure the organization.
“Those exit decisions are very difficult to make for any business manager,” Bedford says. “You have to make a very realistic assessment of what your strengths and weaknesses are and try to move the business along to your strengths and away from the things that you’re not competitive doing.”
Bedford’s first step was to stabilize the company’s financial position. Suffering some significant operating losses, Republic’s cash position had been depleted to very low levels.
“We had all the classic worries of a business in financial distress — how do you make payroll?” Bedford says. “Step one was get the flights to complete, get them to complete on time and deliver the customers’ luggage at the end of the trip. We made some strong commitments to them in terms of our steps to remediate crew shortage and the quality concerns on the product.
“We put the money, the time and the management focus on accomplishing those goals. Within 90 days, we had accomplished that. We had to assess where the shortfalls were and why we were having a difficulty. We had to go out and hire more pilots, and we had to acquire simulator training for those pilots, which obviously took time and financial resources. That was an investment we had to make in order to return the operation to a stable, quality performance level.”
It takes eight to 10 weeks to train pilots and get them into the schedule.
“We were looking at ways we could utilize our existing resources more productively,” Bedford says. “You can’t just change pilot schedules. There’s a process by which schedules have to go out for bid and then ultimately be executed.”
With the business more stable, Bedford was able to turn his attention to diversifying the revenue stream.
“That’s not unique to our business,” he says. “If you’re in the automotive business, you prefer not to have one customer in General Motors; you prefer to serve as many customers as you can. Today, we have four. Obviously, five would be better. Six would be better than five. The goal has always been to develop new relationships that leverage our strengths.
“We knew we needed to do a more quantum change for the business. If we were talking football, that’s when we knew we needed to throw the Hail Mary pass. We decided we were going to exit the pro-rate flying (replacing it with a fixed-fee model) and exit the turboprop flying and concentrate solely on operating the regional jets.”
In a fixed-fee model, there is no revenue risk to the company, because the airline’s partners are guaranteeing a certain usage rate, and therefore, a fixed revenue, providing a much more consistent revenue stream. The company also began replacing the turboprops with jets, which made it more appealing as a potential partner to other airlines.
In February of 2000, Bedford inked a deal with the company’s second marketing partner — a point when the company really started turning around. Republic started making money in the second quarter of 2000 and hasn’t had a money-losing quarter since.