MIAMI — The first shots have been fired by American Airlines Group (NASDAQ: AAL) in the looming battle over the pilot shortage in the United States. On Wednesday, the Envoy (pre-merger American Eagle) Master Executive Council (MEC) for the Air Line Pilots Association (ALPA) refused to send the tentative agreement (TA) based on the agreement in principle (AIP) that Envoy management reached with the MEC’s negotiating committee (basically, they rejected a contract). The agreement would have brought 60 new Embraer E175s worth of large regional jet flying and a commitment to maintain at least 170 aircraft worth of total flying to Envoy in return for cost concessions from employees.

However, thanks to the rejection by the MEC, American has responded in kind by beginning to shrink Envoy. Not only will Envoy not receive the 60 new Embraer E175s, its current 47 Bombardier CRJ-700s will now slowly be transitioned to other carriers. While Envoy will retain some 50-seat jet flying in the form of Embraer E145 jets, these aircraft are growing increasingly uneconomical due to rising maintenance costs and higher fuel price levels. The new American, like many of its peers, will rapidly move to eliminate 50 seat jet flying over the next five years, leaving Envoy without a stable flying base in the future. The broader company will still have its ground services business to generate revenues, but its pilots will mostly be out of jobs (at Envoy).

American Eagle’s MEC is banking on using the growing pilot shortage in the United States as a negotiating tactic to eventually win a more lucrative contract from management. Thanks to new FAA FAR Part 117 crew scheduling regulations, a new FAA regulation requiring pilots to have 1,500 costly hours of flying experience before flying commercially (up from 250), and the notoriously low pilot pay in the regional airline industry, the US airline industry is rapidly running up against a pilot’s shortage. That pilot shortage claimed its first victim earlier this week, when regional provider Republic Airways Holdings (NYSE: RAH) involuntarily parked 27 regional jets (including 15 Embraer ERJ-140 aircraft operated for American) citing a lack of pilots.

The major threat in the near term for pilots is that American Airlines had reportedly threatened to turn Envoy into “Comair II,” following in the footsteps of rival Delta Air Lines (NYSE: DAL) in shrinking a wholly owned regional operator until it is small enough to be liquidated. However, MEC members specifically referred to that threat in their comments, essentially welcoming it if management would not accommodate their demands. ALPA leaders have also committed to help any displaced Envoy pilots find new employment elsewhere in the industry. And unfortunately, if the two groups are unable to come to a new agreement, it does appear that the current Envoy operation will eventually be wound down.

Read below for a response to the move from Envoy, aka American Eagle, CEO, Pedro Fabregas.

Thursday, Feb. 13, 2014

Special Eaglewire

ALPA MEC Declines to Send Agreement to Our Pilots for a Ratification Vote

Dear Team,

I am extremely disappointed the Master Executive Council (MEC) of the Air Line Pilots Association (ALPA) decided yesterday not to send the Tentative Agreement (TA) to our pilots for a ratification vote. Unfortunately, their decision to deny our pilots a vote means the loss of what would have been a very important opportunity for each individual pilot, our company and all the people who work here.

Before discussing what this means for us moving forward, I want to give you some background about what happened between the time the negotiations began and yesterday’s MEC decision. Beginning last December, our team worked tirelessly with the MEC’s negotiating committee to craft an agreement that not only contained compromises by both sides, but also would have benefited both the company and our pilots. On Jan. 10, the MEC ultimately agreed to what became the Agreement in Principle (AIP). The parties then began working over the last month to develop detailed contract language from the AIP to create the TA.

The TA’s terms addressed each of the most important priorities for our pilots that ALPA identified, while staying within the economic framework supported by company. If ratified by our pilots, it would have: enhanced our pilots’ job security; improved their ability to quickly advance their careers here and at American Airlines with industry-leading flow through; provided us with our first-ever fleet commitment for a minimum of 170 aircraft; and ensured the placement of new, larger regional jets, the Embraer 175s (E175), at our company. The resulting language from this back and forth was deemed satisfactory and in keeping with the AIP by both the company and the MEC’s negotiating committee. This was then sent to the MEC and yesterday they declined to send it out for a pilot vote.

American has now informed us they have no choice but to begin looking for another regional carrier or carriers to operate their E175s. American has held off on making this decision as long as possible, as they wanted to give our pilots the chance to do this flying. This was discussed with ALPA and with yesterday’s MEC decision, American can’t wait any longer and will begin these efforts immediately.

American Eagle Airlines will continue to work toward making our flying operation as competitive as possible while addressing the downsizing of our fleet and related staffing in the coming years. Unfortunately, many difficult decisions will have to be made during this time. We will proceed with retiring some of the smaller aircraft in our current fleet. American can also be expected to look for more economic options to provide regional feed and, eventually, other and more cost-effective carriers will fly the larger aircraft currently on our certificate such as the Bombardier CRJ700s.

While the AIP would have offered our pilots and our flying business a robust future, I do want to stress our company does not and has not relied on flying alone to generate growth and revenue. American Eagle Airlines will remain an airline, even with our reduced flying operation. The ALPA MEC’s statement asking us to provide a timetable for the company’s “liquidation” is not something we can provide as we are not planning to shut down the airline. Our ground handling operation continues to thrive and we have added new business and employees there at a rapid pace and will aggressively seek to continue this trend. The MEC’s decision does not change or impact this and opportunities still exist there, but I have no reason to believe American will offer us new large regional jet flying after these unsuccessful negotiations.

I commit to keeping you updated on this process, news and developments as we move forward and as more details are known.

As always, thank you for all of your work on behalf of our customers and company.

Regards,

Pedro