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Monday, December 3, 2007

Analysis: AMR to Divest American Eagle

Now that AMR has announced the sale of American Eagle, analysts suggested the regional might bring over $1 billion dollars. However, it is unclear as to whether or not this will be an easy sale given the American Eagle fleet and strained labor relations. The investment community has pressured airlines to boost the price of their stocks through divestiture of assets, in particular regional affiliates such as American Eagle and the frequent flyer programs.
“This is probably the first of the next round of such actions,” BACK Aviation Solutions Analyst Tulinda Larsen told Regional Aviation News. “The majors have to divest, they need the money and these airlines are operated much better on the outside.”
AMR Chair and CEO Gerard Arpey noted that divestiture of American Eagle and the regional airline's ability to provide quality feed at competitive rates to other carriers, as well as American, will better position Eagle to compete for new customers and growth opportunities in the future. It is widely known that other regionals – Mesa, Republic and SkyWest – want to grow but there is little growth opportunity in the U.S. Adding American to their stable of clients would achieve that goal at the same time lending their management expertise to cutting costs. In addition, MAIR, Holdings, which lost Mesaba this year, is also seeking new opportunities since its only source of income is Big Sky Airlines. However, it is still struggling to make Big Sky profitable. Pinnacle is also in an acquisition mode having just acquired Colgan Air and the Bombardier Q400 for the latter airline’s fleet. While most regionals have very healthy cash positions to accommodate such an investment, they, too, have been pressured by the investment community and many have authorized stock repurchase programs.
AMR is evaluating what form the divestiture will take and may include a spin-off to AMR shareholders, a sale to a third party, or some other form of separation from AMR. The company expects to complete the divestiture in 2008 and would include both American Eagle Airlines, Inc., which feeds American Airlines hubs throughout North America, and its affiliate, Executive Airlines, Inc., which carries the American Eagle name throughout the Bahamas and the Caribbean from bases in Miami and San Juan, Puerto Rico.
American Eagle flies a disparate fleet including the Saab 340 and the ATR 72 turboprops, the Bombardier CRJ 700 as well as Embraer jets including the ERJ 135, 140 and 145. Any new owner will ultimately be responsible for rationalizing the fleet as the trend toward upgauging to larger regional jets continues. In addition, it will have to substantially reduce costs in order to be competitive with other capacity purchase regional operations and retain its American operation, despite the long-term contract completed earlier this year that reflected market-based rates. It only took a few years for Continental to spin off 25 percent of ExpressJet’s Continental Express operation owing to its higher costs. AMR has already signaled its intentions. CFO Thomas Horton said that, at some point in the future, American could divide its regional flying contracts among several airlines and use competition to drive down the price it pays. Currently, there are no outstanding requests for proposals for new capacity purchase deals with the latest round having been concluded this year.
For now, however, American Eagle has a stable base with long-term contracts and is expected to generate annual revenues of approximately $2.4 billion this year. While American has reorganized its regional operation in order to prepare it for becoming an independent airline, the efforts did not achieve profitability.During the third quarter, American Eagle contributed $648 million to AMR’s total operating revenues of $5.9 billion. Expenses, however, while down, reached $701 million. The regional flew 2.6 billion revenue passenger miles, up 1.3 percent while available seat miles were down 0.9 percent to 3.4 billion. Load factor was up 1.7 points to 75.9 percent. For the nine months, American Eagle revenues dropped to $1.8 billion, down 12.7 percent, while AMR revenues were up only slightly (0.5 percent) to $17.2 billion. American Eagle expenses for the nine months rose from $2 billion in 2006 to $2.1 billion. The regional’s RPMs and ASMs dropped 0.7 percent to 7.4 billion and 10 billion, respectively, during the period and load factor remained unchanged at 74 percent. Related Story www.aviationtoday.com/ran/categories/commercial/16771.html An independent Eagle qualifies as a major carrier with its revenues exceeding the $1 billion mark that defines such a carrier as do many other regional carriers.
This is the first divestiture since the 2005 sale by Delta of Atlantic Southeast Airlines to SkyWest Inc for $425 million. Continental spun off Continental Express which became ExpressJet in 2002. This leaves a handful of airlines with wholly owned regionals including Alaska with Horizon, recovering from the loss of its Frontier Jet Express operation, which analysts have suggested be sold since its losses drag down Alaska’s fiscal results. In addition, Delta still owns Comair which has also been the subject of divestiture speculation, especially prior to Delta emerging from bankruptcy earlier this year. Finally, USAirways Express includes wholly owned regional airline subsidiaries, Piedmont Airlines and PSA Airlines, US Airways' MidAtlantic regional jet division.
Bucking the trend is Northwest, which, earlier this year, acquired Mesaba from MAIR Holdings, bringing Mesaba out of bankruptcy. In addition, Frontier is on the cusp of launching Lynx Aviation, a wholly owned subsidiary using Bombardier Q400s to feed the low-cost carrier.
The sale could also be affected by the company’s relationship with American Eagle pilots. "Any new ownership would be subject to our existing collective bargaining agreement, which contains protections for our pilots in the event of a sale or merger,” said Captain Herb Mark, chairman of the American Eagle pilots union, a unit of the Air Line Pilots Association, Int'l (ALPA). "Regardless of who owns American Eagle, nothing is more important to ALPA than resolving the issues that have created strained labor relations between the pilots and management. For several years pilots have been forced to fly more hours in a day because of understaffing. The staffing shortage has led to exhausting flight schedules, causing our pilots to sacrifice needed rest in order to meet the company's bottom line. We fully expect that our sacrifices will be respected and rewarded as we become a partner in whatever lies ahead.”
Horton, who, with CEO Gerard Arpey, began signaling the divestiture move last summer, called American Eagle "a fully developed operating unit with an industry leadership position, [and] a strong management team." Horton told The Associated Press growth and expansion of American Eagle would also reduce the average seniority as new pilots are brought in, making it more cost competitive.
“The decision comes after a careful and deliberate evaluation of the strategy that will best enable us to continue to create value for our shareholders,” said Arpey. “We have worked hard over the years to build a regional airline that is fully capable of standing on its own and is well positioned to pursue growth opportunities outside of the AMR corporate structure.” AMR said it put in place an independent American Eagle management structure, with a chief executive officer and chief financial officer, American Eagle also has a well-formed operational structure and organization and has produced independently audited financial results for the past several years. American Eagle employs more than 13,000 workers, operates about 300 planes and makes about 1,700 flights a day to more than 150 cities throughout the United States, Canada, the Bahamas, the Caribbean and Mexico.
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