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"We want more diversity in terms of where we harvest revenues, not less, and this is a necessary step we felt we had to take to reorient our business model to changing industry conditions," he said.

Republic said it would pay $6 million in cash and extend a $25 million note to Midwest owner TPG Capital. The note is convertible to Republic shares at $10 per share.

Midwest had owed TPG $31 million, so the sale basically repays TPG for $6 million of that debt and refinances the rest.

Republic said it expects the deal to close in one month to six weeks.

Oak Creek, Wis.-based Midwest has been struggling with other carriers encroaching on its Milwaukee hub. AirTran has an extensive schedule there, and Southwest plans to add flights there later this year.

As Midwest has shrunk, it has hired Republic to do much of its flying.

Republic plans to replace all of Midwest's Boeing 717s with Embraer 190s once the separate unions that represent pilots and flight attendants merge their ranks, Bedford said. Republic pilots and flight attendants are Teamsters. Midwest crews are represented by the Air Line Pilots Association and the Association of Flight Attendants. Republic has roughly 2,000 active pilots, Midwest about 100, Bedford said.

As recently as last summer, Midwest's fleet included 12 MD-80s and 25 Boeing 717s. But it grounded all the MD-80s last year, and currently fly only nine of the 717s.

Republic shares spiked after the news hit about a half-hour before markets closed. They rose $1.90, or 47.3 percent, to close at $6.00.