AMR to Spin Off Regional Carrier
By Timothy W. Martin, The Wall Street Journal | Aug. 12, 2011
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American Airlines parent AMR Corp. provided details Thursday of its plans to spin off its in-house regional carrier to shareholders later this year, a divestiture aimed at reducing the parent company's costs.
AMR's goal in a spinoff of its Eagle unit would be to bring down its costs for commuter flights, for which it pays more than the other big airlines, airline analysts and consultants say.
For a divestiture to succeed, analysts and consultants add, Eagle would have to win new business with major carriers such as Delta Air Lines Inc. or United Continental Holdings Inc. The big airlines sell the tickets and book reservations for shorter or smaller regional flights, but contract the planes and crew of smaller carriers to fly the routes.
American, in turn, would be likely to seek cheaper regional options, contracting with other regional carriers for some flights that Eagle currently services.
"This all starts from a position of American paying too much for regional flights and that Eagle is too expensive," said Robert Mann, an airline consultant for R.W. Mann & Co., in Port Washington, N.Y.
Eagle would compete to win business away from other regional carriers, such as Republic Airways Holdings Inc. and SkyWest Inc., which serve units of Continental, Delta, US Airways Group Inc. and other airlines.
AMR said in a written statement it still "could decide to retain Eagle" and that it would remain open to a sale-two options the company has explored since 2007.
In a phone interview, Dan Garton, Eagle's president and chief executive, said major carriers, based on early discussions, are "intrigued."
"We already have a pretty well-defined network," Mr. Garton said, citing flights throughout the U.S., as well as in Latin America and the Caribbean. "We have high confidence that we can grow," he added.
Eagle has a nine-year agreement with American, starting when the divestiture officially occurs, to keep flying regional flights. Next year, a dozen Eagle prop aircraft will open up for rebidding by Eagle or its competitors. That number will accelerate to a total of as many as 40 jets by 2014.
In a letter to pilots, Tony Gutierrez, chairman of the Eagle unit of the Air Line Pilots Association, promised to protect both "current and future jobs" of Eagle pilots.
Eagle operates 93% of American's regional flights, with 281 aircraft and service to 182 cities. Eagle says it is the third-largest U.S. regional airline, based on aircraft operated, after SkyWest and Republic Airways.
Outside of American, Eagle expects 14 contract renewals to come up at other major airlines over the next five years, covering leases for 276 airplanes.
Regional airlines carry nearly one in every four U.S. travelers annually, totaling 153 million passengers last year, according to the Regional Airline Association, an industry group.
But the regional carrier market is "fast shrinking," said Michael Boyd, a consultant for the Boyd Group International Inc., because of current fuel prices and high maintenance costs for the smaller planes. By 2018, Mr. Boyd expects the regional jet market will be served by just 500 regional jets-or just one-third the size it is today.
Eagle said Thursday that its profit declined 18% to US$9.9 million for the six months ended June 30 from US$12.1 million a year earlier.
Revenue increased 17% to US$1.29 billion from US$1.1 billion.
AMR said in a registration form with the Securities and Exchange Commission that it intends to spin off AMR Eagle Holding Corp., renaming it and giving current AMR stockholders 100% ownership of the separate, publicly traded company.
As part of the planned spinoff, handled by Citigroup Global Markets Inc. and Evercore Partners, American will assume about US$2 billion in Eagle debt and leases, AMR treasurer Beverly Goulet said during an interview.
Regional airlines boomed after the 2001 terrorist attacks, as major carriers-many of which were so cashless they filed for bankruptcy protection- outsourced flights to cut costs. But in recent years, regional airlines have been pressured to lower their rates and big airlines have retrenched or closed marginal hubs. For instance, Delta last month said it would retire 60 of its 50-seat regional jets by the end of 2012.