Continental Express and Delta Connection operations posted the normal profitability for the second quarter, while American Eagle posted its usual losses at a time when parent-company AMR was trying to sell it. However, AMR announced last week it was putting the divestiture on hold. Meanwhile, Delta said it will take 100 RJs out of its system as part of its planned capacity cuts, 30 more than previously announced.

American Eagle Divestiture on Hold
AMR announced that while there has been some interest in acquiring its American Eagle operation, it has put the sale, announced last November, on hold pending stabilization in the industry and more favorable conditions. Related Story
“While the Eagle transaction is on hold,” said AMR's Executive Vice President - Finance and Planning and Chief Financial Officer Thomas W. Horton, “the strategic rationale remains intact. But we have decided to reserve our flexibility and wait until the industry has stabilized before moving forward.”
In the meantime, the company recently announced that it is taking 37 regional jets and 26 Saab 340s out of service as part of the 10 to 11 percent in capacity reductions at Eagle. The aircraft being shed are owned by AMR, said the company, which hopes to sell them.
Revenues for American’s regional affiliates reach $683 million in the second quarter compared to $658 million in the year-ago period, a swing of 3.8 percent and despite a three percent drop in capacity. AMR Corporation, the parent company of American Airlines, Inc., reported a net loss of $1.4 billion for the second quarter of 2008.
Regional affiliate expenses rose to $904 million compared to $710 million in the year-ago quarter while AMR’s total expenses AMR posted a loss of $284 million, a $600 million swing from the $317 million posted in Q207, according to Chair and CEO Gerard Arpey, who briefed analysts last week, noting that American has participated in 30 fare increases this year and has added fees that will generate $100 million. Horton reiterated special items taken during the quarter including $1.1 billion in write downs for the 30 MD-80s and Embraer ERJ 135 aircraft it is currently grounding.
AMR is studying further capacity reductions for next year and anticipates more cuts although it will not be until the end of the third quarter that it will provide guidance. Following its capacity reduction announcement in May, AMR expects its full-year mainline capacity to decrease by 3.4 percent in 2008 compared to 2007 with a 5.7 percent reduction in domestic capacity and a 0.7 percent increase in international capacity. On a consolidated basis, AMR expects full-year capacity to decrease by 3.7 percent in 2008 compared to 2007.
A Credit Suisse analyst indicated corporate travel managers have said the business travel will be cut by as much as 20 percent for the rest of the year, but Horton said third quarter bookings are up from last year eight tenths of a percent, most of which is for international travel. “Again, it underscores that the industry will need to reduce capacity to create a supply/demand balance to allow us to get prices to a level to support the business,” he said.
Horton also indicated that the five American and 37 Eagle flights scheduled to come out of La Guardia represents more than a third of the overall reductions needed. As for the potential to lose the slots under the use-it-or-lose-it rule, it is AMR’s hope they would be retired as a step in the right direction for improving reliability. “LGA cannot operate anywhere near reliability at the current capacity it is trying to operate,” he said. “We are willing to relinquish those slots” as long as no newcomer is allowed in to operate them. Instead, AMR would have FAA and DOT eliminate the slots until such time as airspace redesign and modernization is in place to accommodate more operations reliably
“We could go back in to protect them but that is not what we want to do,” he concluded. “But the DOT and FAA need to step in and do something to further reduce operations at La Guardia.”
For the first six months, regional affiliates took in $1.264 billion, an increase of 3.9 percent, while AMR had total operating revenues of $11.876 billion, up five percent.
Revenue passenger miles for the second quarter were down 7.5 percent to 2.400 billion while available seat miles dropped 3.1 percent to 3.274 billion. Load factor was 73.3 percent down 3.5 points. For the first half, RPMs droped 3.9 percent to 1.264 and ASMs dropped 4.1 percent to 6.380 billion. Load factor declined 1.8 points to 71.2 percent.

XJT Ekes Out Premium
In the end, ExpressJet (XJT) was able to manage a premium on the industry capacity purchase standard rate as part of its new contract with Continental, according the major carrier, which said that it weighed the cost of disruption of changing to SkyWest against the premium and decided to stand pat with ExpressJet. Related Story XJT had wanted to premium on industry rates because of the golden share, and possibly restrictions, Continental still holds on its former subsidiary.
“If you looked at it from a pure competitive bid situation, we might have been able to get a lower rate than where we were, but we’ve made a significant improvement in our rate and we are very comfortable with that,” CEO Larry Kellner told investment analysts last week. He should be comfortable with the new rate considering it results in an annual savings of approximately $50 million. He noted that Express Jet does a very good job for Continental and, given the fact that XJT represents the bulk of the Continental Express program, it does contribute substantially to the bottom line.
Revenues from Continental’s regional operation exceeded expenses by almost $100 million, according to the second quarter report issued by the major carrier. Continental Express/Connection, including ExpressJet, Colgan, Chautauqua and CommutAir, operations took in $666 million in operating revenues, a 15.6 percent increase from the year-ago period. Unfortunately, regional revenues equaled the total year-over-year impact of higher fuel costs on the company for the second quarter. Continental also incurred additional fuel costs of $124 million year-over-year that were included as part of its regional capacity purchase cost. Regional operations’ revenue per available seat mile jumped 6.4 percent while available seat miles rose by 8.6 percent. Regional expenses rose 32.7 percent, however, to $589 million. Continental reported a net loss of $3 million.
XJT, which currently operates 205 aircraft as part of the new contract which became effective July 1, will drop 15 aircraft in 2009. Continental is closing six stations served exclusively by regionals. Continental Express capacity will drop by 4.1 percent in the fourth quarter and between 5.4 percent and 7.4 percent in 2009. Related Story
Kellner indicated that the new contract provided stability to ExpressJet which now knows it will be operating as a Continental Express over the long term. The contract, he said, eliminated several restrictions, giving the regional the flexibility to become stronger and more viable in the future, he said. The comments on XJT came in response to analyst concerns about the possibility of bankruptcy for ExpressJet.
As for capacity cuts, the guidance issued to analysts and investors last week showed that the 30 Embraer ERJ 135s now in operation will be eliminated by year end. It is also eliminating the 24 Bombardier CRJ 200LRs in operation with seven out this year, another 10 next year and the last seven in 2010. It expects to complete the acquisition of all 15 Bombardier Q400s this year, adding two to the current 13 and guidance shows it has no plans to acquire more between now and 2010. Nor does it have any plans to change its fleet of 16 Q200s through 2010.
Continental Express currently operates 195 ERJ 145s and next year will add back the 39 that ExpressJet intends to return now that its Delta Connection program has been cancelled and its branded service is being shut down. Continental will then take 10 of those out in 2010 for a total of 224. Related Story
Continental’s regionals are expected to consume 82 million gallons of fuel in Q3 at an average cost of $3.92 and 314 million for the full year at an average price of $3.50 per gallon.



Delta to Eliminate More Than 100 RJs
The equivalent of 100 regional jets will be removed from Delta Connection operations by year end, according to CEO Richard Anderson, who spoke to analysts during the company’s second quarter webcast. President and CFO Ed Bastion told investors that, in addition to the ExpressJet and Freedom terminations, there will be more announcements forthcoming over the next few months.While the company moved to terminate the Pinnacle contract the two carriers reached an agreement last week, retaining Pinnacle's Delta Connection service through the end of the contract in 2017. Anderson also pinpointed the profitability failure of 50-seat RJs on long-haul routes, indicating they will be coming out of the Delta Connection system.
The news came as Delta figures show a healthy Delta Connection program, as usual. During the second quarter, Delta Connection operations took in $1.143 billion in operating revenues up from the $1.09 billion in the year-ago period. Contract services expenses, however, were approximately $257 million compared to the $243 million in the Q207. Delta ended the quarter with a $1 billion loss.
For the six months, regional operating revenues reached $2.182 billion compared to $2.056 in the year-ago period. Contract services expenses grew from $486 million in 2Q07 to $511 million in the second quarter this year.
Delta’s fleet includes a total of 84 Bombardier CRJ 100s, of which 22 are owned, 13 leased and 49 on operating lease. Its CRJ 200s total 17, five of which are owned and 12 are on operating lease. It has 15 owned CRJ 700s and 13 owned CRJ 900s, with another eight on order, besides the seven remaining aircraft orders assigned to Pinnacle. Finally it also has 85 options for the CRJ 900. The vast majority of Delta Connection aircraft are owned by regional operators.
How much regionals will be affected by the cuts is unclear pending the outcome of the Mesa’s litigation, on behalf of subsidiary Freedom Airlines, against Delta. Related Story
Although Pinnacle is in discussions to figure out a way it can continue working with Delta, it told a local reported it will lose $3.5 million monthly, should the contract end. Pinnacle has repeatedly said that Delta's schedule was too tight to allow it to meet performance requirements. Related Story Memphis Commercial Appeal Reporter Jane Roberts reported that, with only nine planes, “a few late departures or arrivals quickly added up to big percentages, putting Pinnacle behind the eight ball.”
She also reported that the regional will not seek an injunction in favor of working it out personally with Delta. The six-month-old contract expanded from a single CRJ-900 operation, to a fleet of 16, acquired by Pinnacle, nine of which are dedicated to Delta, said Roberts, who added they fly about 50 daily routes, which represents about four percent of Pinnacle’s revenue. However, it was the airline’s first bid to spread its operations beyond Northwest, something it was precluded from doing as part of its Airlink agreement, which changed only last year.

Delta Connection Operations include:
Atlantic Southeast Airlines – 141 total aircraft, including 110 CRJ 200s, 31 CJR 700s
Chautauqua (Republic Airways Holdings) – 39-40 total, a mix of Embraer ERJ 135s and 145s. Chautauqua will lose another seven ERJ 145s when its United Express agreement ends next year.
Comair – 130 total, 102 CRJ 200s, 17 CRJ 700s, 11 CRJ 700s. It is grounding 14 RJs.
ExpressJet – 23 ERJ 145s, all of which are being eliminated. Its Delta Connection flying at Salt Lake City is being reassigned.
Freedom (Mesa Air Group) – 49 total, including 35 ERJ 145s which are being eliminated but are in dispute, and, under a separate contract, 14 CRJ 900s.
Pinnacle – Nine CRJ 900s
Shuttle America (Republic Airways Holdings) – 16 ERJ 170s
SkyWest – 78 total, including 52 CRJ 200s, nine CRJ 700s and 17 CRJ 900.

In its analyst briefing, Delta indicated that a lot more capacity must be squeezed out the system pointing to the amount of capacity thrown into the market since 2001 to carry low-end traffic compared to Europe. “We are spending a lot of time thinking what the industry model looks like going forward,” said Bastion.
The Delta/Northwest merger will yield additional changes, according to Anderson. “One of the benefits factored into our analysis is the fact we will be a large-scale customer for regional capacity,” he said. “We will have roughly 40 percent of the smaller guage RJs at the time of the merger so you can expect rationalization of that portfolio in addition to the 100 aircraft we have already announced. This also gives us a chance to sit down with our regional partners to talk about how we can do business more effectively and efficiently.
Boyd predicts that the combined carrier will dump even more regional jets in favor of lift from Northwest’s wholly-owned subsidiary Compass Airlines and Bastion seemed to signal just that.
“There a lot of redundancies,” said Bastion, “and a blend of wholly owned and contract carriers. It is interesting to see on the owned side with Comair, Mesaba and Compass; there is very significant overhead and fleet commonality opportunities that can come from operating those more collectively as well as sg&a opportunities.” He indicated each would retain their own separate operating certificates and be operated separately.