Bloomberg News

AMR Eagle Spinoff Slips to 2012 as Pilots Weigh Contract

November 30, 2011

(Updates with closing share price in ninth paragraph.)

Nov. 18 (Bloomberg) -- AMR Corp.’s planned spinoff of the American Eagle regional unit will be delayed until 2012 from this year as pilots consider a proposed contract, slowing American Airlines’ bid to cut operating costs.

Voting on the labor accord won’t be held until January, said Dave Ryter, vice chairman of Eagle’s Air Line Pilots Association chapter. An American spokesman, Sean Collins, said the “final stages of the divestiture” would come only after the balloting.

American already is struggling to negotiate new contracts with its own unions to reduce operating expenses and had set a goal to spin off Eagle in 2011. Fort Worth, Texas-based AMR is heading toward a fourth straight annual loss, kindling speculation that it may file for bankruptcy protection.

“They have to do something to change the way their business model is working,” said Jim Corridore, a Standard & Poor’s analyst in New York with a “hold” rating on AMR stock. “Divesting Eagle is certainly a way to lower costs in the long run.”

Eagle supplies more than 90 percent of American’s regional passenger feed to hub airports from smaller cities. A stand- alone Eagle is intended to let American, the third-largest U.S. airline, seek less-expensive options for those flights and free the new unit to fly under contract for other carriers.

Board Decision

AMR’s board approved separating Eagle in July following more than a year of study. A proposed labor accord negotiated last month for Eagle pilots is now being put into contract language. Once that is done, ALPA and Eagle will brief pilots, and then a 30-day ratification period will begin.

“We plan to wait for the ALPA vote to be concluded before moving through the final stages of the divestiture,” American’s Collins said. “It would provide greater stability for AMR and for Eagle, allowing both companies to have more-competitive cost structures from which to grow their businesses.”

Volatility in capital markets also may “impact the timing” of the spinoff, he said, without giving specifics.

AMR rose 4.7 percent to $1.80 today in New York, which still left the stock down 77 percent this year. Steps such as the planned Eagle spinoff and American’s order of 460 new, fuel- efficient jets in July haven’t eased concern that AMR’s losses will persist unless the larger carrier wins less-expensive labor contracts.

American’s Struggle

American’s stepped-up bargaining with its pilot union, the Allied Pilots Association, failed to produce an agreement by AMR’s Nov. 16 board meeting. Negotiations began in 2006. The airline also is in talks with flight attendants and mechanics to shrink the highest labor costs among U.S. carriers as a percentage of sales.

Work continues to disengage American and Eagle by shifting assets and making organizational changes, American’s Collins said. He said AMR expects the companies to be operating by year’s end under the “financial terms of the new agreements, which will commercially separate the companies.”

Under a regulatory filing in August, American would provide Eagle at least initially with headquarters space and administrative support such as payroll and legal services, for which the smaller carrier will pay a fee.

Eagle’s Fleet

Eagle’s fleet would be owned by American, which would lease the planes back to the regional airline for a “nominal” amount, according to the filing. American also would retain more than $2 billion of debt associated with the planes, which is more than their value.

Eagle, which has 281 aircraft, generated $2.02 billion in revenue through 2011’s first nine months, or more than 11 percent of AMR’s $18 billion total.

American would use all of Eagle’s jet fleet for five years after the spinoff, giving the smaller carrier more time to win contracts with other airlines, according to the proposed pilot contract. That plan also gives Eagle pilots more job protection, the union said.

AMR hasn’t disclosed the ratio of Eagle shares that will be distributed for each AMR unit held, or a record date for the spinoff.

--Editors: Ed Dufner, James Langford

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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