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American Eagle to Remain Part of AAG, Longterm Challenges Remain

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American Eagle to Remain Part of AAG, Longterm Challenges Remain

American Eagle to Remain Part of AAG, Longterm Challenges Remain
December 19
15:57 2013

MIAMI — American Eagle employees can breathe a sigh of relief, as American Airlines Group has confirmed that it has no intention of spinning off the in-house regional carrier in the near future. After several attempts by former owner AMR to rid themselves of the problematic airline-within-an-airline were thwarted over the past several years, it had been expected Eagle would find itself in the storefront yet again post-merger. At least so far, that won’t be happen.

American Eagle has been, to greater and lesser degrees, a thorn in American’s side for the past seven years. The independent airline, which nearly exclusively operates increasingly inefficient and older fifty-seat Embraer 145 regional jets, struggled mightily recently as jet fuel costs rose in the latter part of the last decade.

Labor costs have vexed the regional carrier as well. The airline has some of the highest labor costs in the industry, despite efforts to reduce them during bankruptcy. Additionally, union contracts previously had tight restrictions on the type of aircraft Eagle pilots could fly. While the issue was forcibly resolved during the bankruptcy process, it remains a sticky matter in current negotiations.

The rocky finances, among other factors, have contributed to a less than stellar relationship between Eagle, mainline American Airlines, and their former parent company AMR. AMR twice attempted to offload the increasingly parasitic carrier, first in 2007 and then again in 2010. Its unattractive portfolio of old, uneconomic airplanes in conjunction with a slew of other demons meant buyers were hard to find. Thus, despite its best efforts, AMR wound up deciding to keep Eagle in the fold both times.

The underwhelming relationship continues to persist. More recently, mainline American began outsourcing regional routes to carriers other than its own Eagle, a product of AA’s need to get its own financial house in order during post-bankruptcy restructuring. SkyWest won a contract to fly 50 seat CRJ200 aircraft under the Eagle brand in late 2012. Republic won a contract as well, and began flying 76 seat Embraer 175 airplanes in September of 2013. Though expected and hardly uncommon in the industry (US Airways owned two regionals and still outsourced), the moves were predictably quite unpopular with Eagle.

The future of the airline was expected to crop up yet again following the conclusion of the merger, with many expecting another go at spinning off Eagle. For now, however, a spinoff is not in the cards. A spokesperson for American Airlines Group (AAG), which replaced AMR after the merger, said that AAG is presently “not considering the sale of American Eagle Airlines.”

The spokesperson added that the change of heart was provoked by a change in the competition, razor thin margins, and the need to focus on completing the mainline merger. New American CEO Doug Parker said as much to the Ft. Worth Star-Telegram on December 9th, “Divesting is not something we have even thought about looking at. I’m not saying we won’t one day but we have much, much more to do than spend our time worrying about whether or not we should spin that airline out or not. We haven’t done a bit of work on that and I don’t expect we will for some time. They are part of the airline.”

“Not Out of the Woods”


While American Eagle employees can breathe a sigh of relief that Eagle will not wind up back on the storefront in the near future, industry analyst Henry Harteveldt, with Hudson Crossing LLC, does not think American Eagle “is…out of the woods yet.”

The same problems that have led to Eagle’s troubles remain active issues today. “The regional airline game is one of operational integrity and reliability – and cost,” says Harteveldt.

On both counts Eagle has been less than stellar. Besides issues with extensive operational and labor costs already outlined, Eagle regularly posts some of the worst on-time performance statistics in the industry. The carrier came in last in May of 2013, with 69.9% of flights arriving on-time, and that is just one of many possible examples. Frequent cancellations have also been a sore spot for Eagle, though it is worth noting that the airline operates heavily out of severe weather-prone Chicago O’Hare and Dallas DFW.

Adding to the mire, Eagle is now competing not just against a handful of external regional carriers but also against two new internal ones. The merger delivered three regional airlines into the fold of AAG: Eagle, Piedmont, and PSA.

Mainline American appears to already be willing to play them off one another. AAG’s recent regional jet purchase awarded PSA with thirty Bombardier CRJ-900 jets. Where the remainder of the order will end up, which includes up to sixty Embraer 175 series aircraft, has not yet been decided. Eagle, in tandem with AAG, is currently in talks with its pilots union (ALPA) to negotiate lower labor costs and a wider operational scope for aircraft types.

Harteveldt added that, whether or not AAG is intentionally taking a carrot and stick approach with the remaining aircraft in the order, having three in-house carriers clearly benefits AAG. “With three regional partners they can, in theory, open different stations or route bidding. It gives AAG an enormous amount of flexibility and control, and forces all of the partners to stay on their toes at all times.”

In order to stay in the game against outsourcing to the likes of SkyWest and insourcing to Piedmont, the key is clearly for Eagle to reduce costs and deal with its demons sooner rather than later. If it cannot “bring its costs down or resolve issues with reliability or ALPA, there’s no sentimentality here…at the extreme, they will shut down American Eagle,” Harteveldt said.

Still, while Eagle may not be out of it yet, Harteveldt did not think that it was all death bells. “There is something to be said for having tight control over a regional affiliate…operational reliability, customer experience consistency…there are merits to having an owned and operated a regional operator. If Eagle is able to bring its costs down I think there is no question it will continue to be around and operating as American Eagle and very much a part of AAG. The relationship is a fragile one that is damaged, but it is repairable.”

Airchive Senior Business Correspondent Vinay Bhaskara agrees that Eagle has a significant share of demons, but stopped short of predicting a possible rosy future. “American Eagle has the highest costs in a fixed-fee industry with little potential to win regional business from other carriers, thus is unattractive as a spinoff candidate anyways. I believe that the new American management team will keep things at Eagle status quo until Eagles’ contracts run out in 2016/2017.” After which, Bhashara believes, Eagle risks becoming the next Comair though he added that a turnaround into the good graces of AAG was possible.

Either way, with the folks at the top of AAG taking the first steps in a long road to combine mainline American and US Airways operations, Eagle has received a wonderful Christmas gift: time.

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