The regional carriers are a byproduct of deregulation and as the ranks of the legacy carriers continue to shrink the importance of the regional carrier will begin to shrink as the legacy carriers continue to take back control of their destiny. One of the biggest issues facing the regional airlines is fuel cost and the unions with the main line carriers. I have never been a fan of the regional carriers and it appears that they may have outlived their usefulness; however, take a look at the articles below and remember that the controlling parties for the airplanes are the main line carrier and the unions representing that workforce—not the regional carriers that were created to fill a void.
AMR Corp. (AMR) may give the American Eagle regional unit a better chance of success in a spinoff under a plan to leave the planes and more than $2 billion in associated debt at American Airlines.
American will keep the debt and lease aircraft to Eagle for a token amount, said a person with knowledge of the terms who wasn’t authorized to speak publicly. Fort Worth, Texas-based AMR has said it will give details in a regulatory filing this month.
a) Eagle’s viability is important for American because the small carrier now provides 95 percent of the bigger airline’s regional passenger feed, and bringing in new partners would take months or years. A clean balance sheet would let a stand-alone Eagle cut operating costs, said Jeff Straebler, an RBS Securities Inc. debt strategist in Stamford, Connecticut.
“If American is putting the planes on their books that’s an American issue,” Straebler said in an interview. “It’s no longer an Eagle issue. It becomes a different story versus a regional operator that is taking on the risk of the aircraft.”
Ed Martelle, an American spokesman, declined to comment on a stand-alone Eagle. While AMR’s board approved the divestiture through a planned spinoff, American hasn’t shared specifics such as how much Eagle stock would be awarded for each AMR share. It has said the distribution probably would be this year.
Separating from Eagle is aimed at paring expenses by letting American seek cheaper commuter-flying contracts, including with Eagle. American, the third-largest U.S. airline, has the industry’s highest labor costs, helping drag AMR to three straight annual losses. AMR is the only major U.S. airline company that will report losses this year and in 2012, based on analysts’ estimates compiled by Bloomberg.
Debt associated with Eagle’s fleet is $2.5 billion, according to an AMR regulatory filing. That’s more than what the planes are worth, said the person with knowledge of AMR’s Eagle plan.
No mainline airline has spun off a regional unit and kept planes and debt, said the person, noting that commuter carriers such as Continental Airlines’ ExpressJet Holdings Inc. (XJT) became independent through initial public offerings.
Eagle’s pilot union told members in a July 19 hotline message that American had agreed to take ownership of the regional carrier’s 302 planes, without mentioning the debt. The union is part of talks between American and Eagle on a new flying contract that will set details such as rates
“With this deal, American has some understanding of where they are going to be five years from now and Eagle has a chance of being a stand-alone company,” said Mike Boyd, president of consultant Boyd Group International Inc. in Evergreen, Colorado.
AMR’s struggle to match U.S. rivals in returning to profit has weighed on the stock, with a 49 percent decline in 2011 through yesterday making the company the worst performer among 11 carriers in the Bloomberg U.S. Airlines Index.
In Eagle’s fleet, 72 percent of the planes have 50 or fewer seats, a size that has fallen out of favor as fuel prices have climbed.
“For the regional business as a whole, the 50-seaters are an albatross with fuel at these costs,” Straebler said. Jet fuel for immediate delivery in New York Harbor averaged $3.17 a gallon last quarter, 47 percent more than a year earlier.
Eagle hasn’t been able to add more 70-seat or larger jets to its fleet because of limits set in American’s pilot contract. The spinoff would allow Eagle to operate bigger planes as it seeks contracts with other airlines.
AMR has never broken out financial details for Eagle, whose $2.33 billion in 2010 revenue was about 10 percent of the parent company’s total. Eagle rose to 11 percent of AMR sales in the first half of 2011, and Chief Executive Officer Dan Garton said July 20 the unit has been profitable.
Industry history shows the challenges facing regional units that once flew for a single, larger partner.
Continental sold stock in ExpressJet in 2002 and got rid of the last of its stake in 2007. After deciding to operate flights under its own name, ExpressJet posted three straight annual losses and was bought by SkyWest Inc. (SKYW) in August 2010 for $133 million.
Mesaba Airlines, whose former parent had a market value of more than $200 million in 2004, fetched $62 million in 2010 when Delta Air Lines Inc. (DAL) sold the unit to Pinnacle Airlines Corp. (PNCL) Delta sold the Compass division to Trans States Holdings Inc. for $20.5 million at the same time.
Pinnacle has fared better following its separation via a 2003 initial public offering from Northwest Airlines Corp., which was bought by Delta in 2008. After a 2008 loss, Memphis, Tennessee-based Pinnacle reported profits in 2009 and 2010. With 283 planes, it is similar in size to a stand-alone Eagle.
“If they can break away without debt and without aircraft ownership costs, they probably could get financing for new aircraft to go after new contracts,” Ray Neidl, a Maxim Group LLC analyst in New York, said of Eagle. “It’s a big job, but it’s a doable job. They have a solid franchise, but it needs a lot of polishing.”
A group of Delta Air Lines pilots, at odds with its union over national policies, in particular the outsourcing of jobs to regional carriers, is threatening to form an independent union.
Delta, similar to other airlines, depends on contracts with smaller regional carriers such as Atlanta-based Atlantic Southeast Airlines to perform some of its flying. However, the protesting pilots’ group has objected to the Delta pilot union’s labor agreement that enables the company to outsource a significant amount of its flying to the regional carriers.
Delta pilots are represented by the Air Line Pilots Association, and Delta’s ALPA unit is part of the larger Washington-based Air Line Pilots Association, International, which is the world’s largest airline pilot union. At several regional carriers, pilots also are represented by ALPA.
Organized under the name Delta Pilots Association, the pilots’ group believes this crossover of representation for large and small carriers is a conflict of interest for ALPA.
Delta Pilots Association founder Tim Caplinger told a group of about 20 fellow Delta pilots gathered at a Wednesday morning meeting that his trust in the pilots’ current representation “has been damaged.” He also objected to the ALPA leaders’ level of expenditures and ALPA’s pooling of dues from pilots at multiple airlines.
ALPA advocates, however, said there’s no conflict because each airline’s pilots negotiate their own contract provisions. They also said the union’s size and influence help advance the profession overall, and that includes efforts in Washington to improve federal aviation safety regulations.
Caplinger said 3,300 of Delta’s 12,000 pilots have signed cards seeking a representation election; his goal is to collect 6,500 cards before filing for an election.
Next week I will start a new series on a non scheduled carrier named TRANSOCEAN and not Delta. Almost everyone I have talked to knows about Southern Air Transport, World Airways, Tower Air, Capital, and others but when I ask about TRANSOCEAN I get a blank stare. So, next week we will all know about the original non scheduled/supplemental air carrier. Until then—-take care, fly safe, and remember the responsibilities we all have as “Gatekeepers.”
August 12, 2011