Pilots suggest American Eagle will fade away

A thorough investigation of Eagle's books confirmed what other regionals have been saying since American Eagle's inception in 1984, that its costs are too high. Indeed, it is clear pilots have little hope for one of America's largest regionals. Eagle ranked fourth in size in the industry in mid-2010 with 18.7 million passengers. It is not surprising that is ranks number one in the industry in terms of employment which rose to 9240 employees.

ALPA, representing Eagle pilots, recently completed what the union described as an "open-book review of the company's costs, operations and possible business plans for a proposed independent company," Mr Gutierrez wrote. "We have consulted attorneys, investment bankers, and financial analysts on the potential effects of a divestiture on Eagle."

Mr Gutierrez concluded that Eagle, is suffering from cost disadvantages just as is its major-carrier partner and is unlikely to survive as a stand-alone carrier because costs would make it almost impossible to win competitive CPA contests even for its own routes.

Spinning off Eagle was always been a very long shot given the track record with other regionals that tried to develop independent operations. ExpressJet is perhaps the closest example as Continental Express executives acquired it from Continental renaming it ExpressJet. However, they took more aircraft than was needed for the Continental feeder operations and could not place it in other CPA contracts to increase the client portfolio and the survivability of the company. Thus, they had little choice but to try branded service similar to Horizon but they were modeling themselves on something that was not that successful in the first place. Coupled with the merciless rise in fuel in 2008, the branded operation was forced to cease operations, much as Independence Air nee Atlantic Coast Airlines, had a few years earlier.

The timing for ExpressJet was unpropitious at best but American Eagle faces the same dynamics today, or worse given its costs. Other regionals have passed on the possible acquisition pointing to costs, just as they have passed on the acquisition of Comair. The fact that Eagle could fade away in their favour must be very fetching to them.

Any new owners will need to reduce overhead sharply and it will likely mean a dramatic restructuring beyond that to get costs in line with their regional peers. American Eagle's application for blanket permission to fly to any US Open Skies partner a hint of the future. It already has international experience given its Caribbean, Canadian and Mexican rights already held. But given the revelations of the pilot corps, this can be seen, perhaps, as too little, too late.

Mr Gutierrez's letter confirmed the worst for the operation. "Simply put, AMRs intention is to diversify its regional feed," he said. "Eagle will do less flying for American in the future and our competitors will be hired to perform the flying that we lose. In fact, management has already begun to lay the groundwork necessary to transfer Eagle's aircraft, such that they will be owned by AMR and will be available for other regional carriers to bid on."

To say his members are angry is an understatement given the description of factions that want to mount all out warfare on their parent company. He disagreed, however, saying whether or not the regional remains as a subsidiary will likely not produce any more job security than diversification.

"What has protected us from being whipsawed over the past 14 years has not been our wholly owned status, but our 16-year pilot contract which provided the company with labor stability and a long-term guarantee of industry-standard costs," he responded. "Another significant and stabilizing factor was that AMR is responsible for the mortgages on our aircraft. As those aircraft begin to be paid off over the next few years, we fully expect that AMR will begin the diversification process, even if we remain wholly owned, and subject Eagle to the bidding process to retain its flying. Without intervention, our costs very well could exceed the market rate for regional feed. Therefore, we face the same challenge as a wholly owned carrier as we will if we are an independent company."

Pilots had expected an announcement during AMR's shareholder's meeting this week on 18-May. However, later information indicated the decision on divestiture will be put off, said Mr Gutierrez. Consequently, the union is postponing efforts to negotiate with management to ensure the surviving company "gets off on a solid footing," until after more clarification on American's plans for Eagle.

Mr Gutierrez outlined what can be expected after the divestiture announcement is made. AMR will file a Form 10 with the Securities and Exchange Commission to be followed by a three- to five-month investigation to ensure it has reflected an accurate financial picture. Should the divestiture be approved by the commission, AMR would spin off the regional to existing shareholders to become a publicly traded company.

The union has already filed a grievance on the potential transfer and has already presented its case to an arbitrator. However, it is basing any agreement on gaining a "long-term Air Services Agreement with legitimate guarantees to provide feed for AA and, thereby, the job security".