Republic Airways Holdings incorporated a new subsidiary, "Republic Airline, Inc." (sic), in 1999, but the subsidiary had no activity prior to 2004 and no ability to operate aircraft prior to 2005. In 2004 the holding company activated Republic Airline in reaction to a pilots' suit against American Airlines.

American had awarded the flying of 44-seat regional jets to Chautauqua Airlines, then the main operating subsidiary of Republic Airways Holdings. However, Chautauqua later started to operate 70-seat regional jets on behalf of United Airlines, and this caused American to be in violation of its pilot union scope clause, which prevented another airline from operating on behalf of American if that airline was operating jet aircraft of more than 50 seats, even if such aircraft were operating on behalf of a carrier other than American. To repair the situation, Republic Airways Holdings activated Republic Airline, and upon Part 121 certification in 2005 allowing Republic Airlines to operate commercial service. Republic Airways Holdings then transferred the offending 70-seat regional jets from Chautauqua to Republic Airlines. American was thereby no longer in violation of its pilot union scope clause. Republic Airways Holdings paid US$6.6 million to the pilot union of American Airlines to settle this issue.

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