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Dec. 12 (Bloomberg) -- AMR Corp.’s bankruptcy filing may open the door to reject leases on costly small jets and make deeper cuts in flying at American Airlines’ American Eagle regional unit.
“If you’re going to go into Chapter 11, you may as well fix what’s broke,” said Jeff Kauffman, a Sterne Agee & Leach Inc. analyst in New York. “And what’s broken is the Eagle product.”
Eagle ferries travelers to and from hub airports, providing more 90 percent of the passenger feed to AMR’s American, the third-largest U.S. carrier. Entering court protection ended plans for a spinoff while giving Fort Worth, Texas-based AMR latitude to reshape a business that was targeted for divestiture as far back as 2007.
Shedding jets with 50 or fewer seats is among AMR’s likely bankruptcy steps, Kauffman said in an interview. AMR also may rework labor contracts and aircraft leases, and add planes with 70 or more seats at Eagle, a step resisted by American pilots who want to keep those jobs at the higher-paying big airline.
“They know they have to get out from under Eagle and now a Chapter 11 filing allows them to do it faster,” said Michael Boyd, president of consultant Boyd Group International in Evergreen, Colorado. “They want the crazy aunt out of the attic.”
AMR’s next date in U.S. Bankruptcy Court in New York is tomorrow, when the company is scheduled to seek approval of procedures for resolving certain supplier claims. American declined to discuss any plans for Eagle.
“The future status of the regional network is entirely a function of AMR’s and American’s strategic decisions,” said Tim Smith, an American spokesman. “Those outcomes won’t be known for some time.”
That hasn’t stopped Eagle’s Air Line Pilots Association chapter from warning members of shrinkage to come in a fleet that numbered 299 planes as of Sept. 30. Management is evaluating “all aircraft leases and financing arrangements,” Eagle ALPA Chairman Tony Gutierrez said in a message to the union last week.
AMR took Eagle off the block in 2008 after failing to find a buyer, revived a study of the division’s future in 2010, and decided this year on a spinoff. Until the bankruptcy, the plan was for American to own the planes and lease them to Eagle while keeping more than $2 billion of debt linked to the aircraft. American would be able to seek cheaper regional partners, and Eagle would be free to fly for other carriers.
One of Eagle’s challenges is having 72 percent of its planes with 50 or fewer seats -- a category whose costs have soared after an almost-sixfold surge in jet-fuel prices in the past decade. Delta Air Lines Inc. said in 2009 it would get rid of almost three-fourths of its Comair unit’s 50-seaters.
“American is in the exact wrong position on fleet composition,” said Tim Campbell, who ran regional operations at Northwest Airlines Corp. before its 2008 acquisition by Delta and is now president of Mountain Vista Consulting LLC in St. Paul, Minnesota. “Fifty seats and smaller is not the future.”
Delta and Northwest both restructured commuter operations in court protection. Atlanta-based Delta’s pullback included slashing departures at Cincinnati, a hub for regional flying, by 26 percent in 2005.
Northwest’s Chapter 11 filing the same year spurred one partner, Pinnacle Airlines Corp., to take 11 percent of its planes out of service and another, Mesaba Aviation, to enter court protection. Northwest also created the Compass unit with 76-seat jets flown by pilots paid at regional-airline rates.
Even without a bankruptcy, AMR’s Eagle would be confronting a shifting regional-airline landscape marked by larger planes, consolidation and demands by big carriers for lower-cost service, Campbell said.
SkyWest Inc. bought ExpressJet Holdings Inc. last year, Republic Airways Holdings Inc. is trying to figure out what to do with its money-losing Frontier Airlines, and Pinnacle hired advisers last week to negotiate concessions from lessors, creditors and unions.
“The world has changed, and AMR won’t be able to do anything with Eagle if they don’t fix it now,” Campbell said.
Boyd said he expects Eagle to shrink to just 56 aircraft by 2016, shedding its Embraer SA jets as the 37-, 44- and 50- seaters amass more flight hours and expenses rise for repairs and upkeep.
“At some point in time, they get rid of all the Embraers,” he said. “As they get into 40,000 hours, they turn into maintenance pumpkins. Economics are driving that airplane out of the marketplace.”
AMR also may seek to boost the number of 70-seat jets at Eagle and possibly add 90-seat planes by amending American’s Allied Pilots Association contract. Eagle flies 47 Bombardier Inc.’s 70-seat CRJ700s, the most allowed by the APA accord. The union wants to keep that flying and opposes changing the limit.
“American pretty much has to get that kind of relief,” said George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Virginia. “Something flying in that category at Eagle would match what their competitors are doing. It’s almost a certainty Eagle won’t be the same size it is now, either.”
--With assistance from David McLaughlin in New York. Editors: Ed Dufner, John Lear
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