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The Associated Press July 2, 2010, 3:09PM ET

AMR studies letting Eagle leave American's roost

For the second time in three years, American Airlines' parent is considering whether to sell or spin off regional carrier American Eagle, which ranks near the bottom of government statistics for airline service.

American, like the other major airlines, needs to cut costs. Outsourcing flights that connect travelers between American's hub airports and smaller cities will help it do that.

But Daniel Garton, the executive recently named to lead the smaller carrier, says keeping control of its own regional flights allows American to be more flexible -- it can change routes or add flights on the fly. So a sale of Eagle isn't inevitable.

If American pushes Eagle from the nest, it will join a trend that's been going on for several years. This week, Delta Air Lines Inc. announced it sold two of its regional carriers for $82.5 million. Increasingly, big airlines are outsourcing their regional flights to cut costs.

In 2007, AMR Corp. said it would divest Eagle and focus on running American. But the plan was scrapped in 2008 when record-high fuel prices hurt the value of regional airlines.

"It was cheaper to keep it than get rid of it," says Robert Herbst, a financial analyst who studies airlines.

Herbst thinks the market for Eagle is better now, and that a potential buyer could be Republic Airways Holdings Inc., which in the past year has bought Frontier and Midwest.

Basili Alukos, an airline analyst for Morningstar, thinks AMR would be smart to sell Eagle. He says there is much excess capacity among regional carriers, and if AMR puts its regional feeder service out to bid, it could cut costs.

Last year, Eagle accounted for 10 percent of AMR's revenue, or $2 billion. First-quarter revenue at Eagle was up 9 percent from a year ago. AMR doesn't say if Eagle is profitable.

Garton, who is also AMR's executive vice president of marketing, says he's been meeting with AMR's bankers before holding serious talks with potential buyers. And he's spending time getting to know Eagle.

Eagle is adding 70-seat aircraft to replace some of its older 50-seaters, which aren't economical at high fuel prices. And it's adding first-class seating on some planes, which should help it compete on business-travel routes such as Chicago-Atlanta and Atlanta-New York LaGuardia.

Eagle has consistently scored near the bottom in the Transportation Department's performance rankings of the 19 largest carriers. In the latest figures, for April, Eagle was tied for last in on-time arrivals and next to last for rates of canceled flights and mishandled baggage. So far this year, it bumps passengers more often than any other airline.

Garton says he doesn't have a magic fix, but he promises more attention to keeping flights on time.

"Although I was a marketing guy," he says, "I realize that you can create a lot of fancy ads, but if you don't deliver, the ads won't be effective."

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