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As AMR struggles, its Eagle quietly soars
Small-plane division is growing fast – and may be for sale soon
09:28 PM CDT on Monday, September 15, 2003
By ERIC TORBENSON / The Dallas Morning News
A North Texas airline growing 20 percent a year, and it's not called Southwest?
In fact, it's American Eagle, an arm of Fort Worth-based AMR Corp. that flies smaller planes to American Airlines' hubs.
It's kept a low profile in recent years as its big brother, American, has struggled and flirted with bankruptcy.
Eagle, on the other hand, has grown to become the nation's biggest regional carrier. In May, it broke into the airline industry's top 10, as measured by number of passengers.
That success has encouraged AMR to consider a plan that would spin off Eagle as a separate company. Company managers are busy preparing for that possibility.
"I think our value is not fully recognized," Eagle president Peter Bowler said. "We've been intentionally low key the last several years, but now we've got the foundation in place to be the kind of carrier we want to be."
AMERICAN EAGLE AT A GLANCE
Employees: 11,139
First flight: Nov. 1, 1984
Fleet size: 305 planes
Passengers carried in 2002: 13.9 million
Passengers carried since 1984: More than 125 million
Revenue in 2002: $1.3 billion
Daily flights: More than 1,400
U.S. cities served: 133 in 33 states
Foreign countries/overseas U.S. territories served: 18
Average trip length: 312 miles
Longest trip: Los Angeles to Bentonville, Ark. – 1,147 miles
Shortest trip: St. Thomas to St. Croix – 45 miles
SOURCE: American Eagle
If AMR decides to sell part or all of Eagle, now may be the time. The carrier is expected to grow by more than 20 percent in 2004 as it takes delivery of 42 new regional jets. This year, it expanded its schedule by about 17 percent.
Investors love a good growth story, but Eagle's rapid expansion is expected to slow after 2004 as it accepts fewer new planes. It would be a lot harder to sell Wall Street on a "growing slower than before" airline.
A second big factor in Eagle's spin-off concerns AMR's pension plans, which are about $3 billion short of the cash needed to pay future retirement claims.
That shortfall isn't unusual among the struggling big airlines, and they're all looking at using shares from newly independent regional carriers to close the gap.
"It's all about finding a way to keep the heat on the house during the winter without burning up all the furniture," said Robert Mann, an airline consultant who has worked with American Airlines' pilots union.
Houston-based Continental Airlines spun off its regional carrier, ExpressJet, last year and used $100 million of the money raised to cover shortfalls in its pension plan.
Continental's experience "has a bunch of airlines thinking about doing the same thing," Mr. Mann said.
But selling Eagle shares might not be as easy for AMR as cashing a check, say consultants and Wall Street experts with experience in initial public offerings.
"If Eagle's numbers aren't pristine in every respect, then it's going to be a very difficult sell," said David Menlow, president of IPO Financial Network, where he scouts new public offerings. "This has really become a buyers' market."
Airline consultants also say the market might have had its fill of regional airlines.
ExpressJet stock is lagging below its original selling price of $16 a share. Northwest Airlines also hasn't followed through on a plan to sell shares of its regional carrier, Pinnacle Airlines, to the public.
One problem is that not all regional carriers are doing as well as Eagle. Their revenues are almost always linked to the fortunes of their bigger partners.
Atlantic Coast Airlines' marriage to United Airlines, for example, became a liability when the nation's No. 2 carrier filed for bankruptcy in 2002.
As it reorganized, United asked Atlantic Coast to lower its rates, a move that would have cut deeply into the regional carrier's profits.
The regional carrier refused and instead announced a plan to operate independently out of Washington's Dulles International Airport. Wall Street didn't react favorably, and Atlantic Coast's shares tumbled by more than a third.
Eagle's ties to American could hurt how its stock would fare, Mr. Menlow said.
"The health of the parent company and the intentions of the parent company would be key factors," he said. "If the deal is viewed as an effort to shore up the balance sheet of AMR, it's going to be difficult."
The company lost more than $5.2 billion in the last 2 ½ years, though it appears to have stanched the fiscal bleeding this summer. What's less clear is how AMR will fare in the fall and winter – when airline revenues traditionally slump.
"I don't think AMR needs the cash as much as they did before – they've improved their position this summer," said airline analyst Ray Neidl of Blaylock & Partners. "A spinoff is something I've suspected they'd do for a couple of years, but I think they can get a better price for it if they wait."
What's it worth?
It's tricky to calculate what Eagle might be worth. Mr. Bowler, the carrier's president, projects Eagle's 2003 revenue at about $1.5 billion, but that doesn't tell the whole story.
Some industry experts look to Continental's experience with ExpressJet for hints. ExpressJet's current market value – the number of shares multiplied by the price – is $900 million, and a number of analysts suggest Eagle could be worth more.
"That's the shortcut way to come to a value, by looking at ExpressJet," said Barbara Beyer, president of aviation consulting firm Avmark Inc.
The true value could vary by hundreds of millions of dollars. And how much AMR would see from the sale would depend on how much it wanted to sell. Continental, for example, still owns about half of ExpressJet.
Mr. Bowler, meanwhile, is concentrating on improving Eagle's operations – on-time performance and baggage handling among his priorities – and preparing his employees for the dozens of new jets set for delivery.
"Our passenger service ratings are at the highest point they've ever been," he said.
Eagle also has benefited from American's trouble. The larger airline, seeking to pare costs by $4 billion a year, has cut service by about 15 percent in the last two years, some of which has been transferred to Eagle.
"We'll have lots of opportunities backfilling for American," Mr. Bowler said.
Labor problems
As with any large carrier, Eagle has its share of labor difficulties. Its flight attendants union has been negotiating a new contract since 2001, and Eagle asked a federal mediator last week to intervene.
Bill Hennessey, president of the flight attendants union, describes the talks as going "poorly."
Eagle's pilots union also has complained about what it says is management's lack of respect.
"One of the most frustrating parts of our relationship seems to be the inability to be constructive," said Dave Ryter, vice chairman for the chapter of the Air Line Pilots Association that represents Eagle pilots.
"Over at American, before they put out a change in a manual they'll engage the union and say to them, 'Take your safety guys and tell us what you think of them,' " Mr. Ryter said. "Here, we find out about changes the day after our pilots find out about them because we can't ever seem to engage in a constructive atmosphere."
Pilots union officials say they aren't concerned with the effect of a potential sale on their jobs, but the uncertainty around it unnerves many of their members. "It's something that AMR is always telling us is on the table," union president Herb Mark said.
Will AMR look to sell? Company officials aren't saying either way.
"We don't speculate about hypothetical scenarios," said Gus Whitcomb, spokesman for AMR and American.
BOLD ADDED BY MODERATOR
E-mail [email protected]
Small-plane division is growing fast – and may be for sale soon
09:28 PM CDT on Monday, September 15, 2003
By ERIC TORBENSON / The Dallas Morning News
A North Texas airline growing 20 percent a year, and it's not called Southwest?
In fact, it's American Eagle, an arm of Fort Worth-based AMR Corp. that flies smaller planes to American Airlines' hubs.
It's kept a low profile in recent years as its big brother, American, has struggled and flirted with bankruptcy.
Eagle, on the other hand, has grown to become the nation's biggest regional carrier. In May, it broke into the airline industry's top 10, as measured by number of passengers.
That success has encouraged AMR to consider a plan that would spin off Eagle as a separate company. Company managers are busy preparing for that possibility.
"I think our value is not fully recognized," Eagle president Peter Bowler said. "We've been intentionally low key the last several years, but now we've got the foundation in place to be the kind of carrier we want to be."
AMERICAN EAGLE AT A GLANCE
Employees: 11,139
First flight: Nov. 1, 1984
Fleet size: 305 planes
Passengers carried in 2002: 13.9 million
Passengers carried since 1984: More than 125 million
Revenue in 2002: $1.3 billion
Daily flights: More than 1,400
U.S. cities served: 133 in 33 states
Foreign countries/overseas U.S. territories served: 18
Average trip length: 312 miles
Longest trip: Los Angeles to Bentonville, Ark. – 1,147 miles
Shortest trip: St. Thomas to St. Croix – 45 miles
SOURCE: American Eagle
If AMR decides to sell part or all of Eagle, now may be the time. The carrier is expected to grow by more than 20 percent in 2004 as it takes delivery of 42 new regional jets. This year, it expanded its schedule by about 17 percent.
Investors love a good growth story, but Eagle's rapid expansion is expected to slow after 2004 as it accepts fewer new planes. It would be a lot harder to sell Wall Street on a "growing slower than before" airline.
A second big factor in Eagle's spin-off concerns AMR's pension plans, which are about $3 billion short of the cash needed to pay future retirement claims.
That shortfall isn't unusual among the struggling big airlines, and they're all looking at using shares from newly independent regional carriers to close the gap.
"It's all about finding a way to keep the heat on the house during the winter without burning up all the furniture," said Robert Mann, an airline consultant who has worked with American Airlines' pilots union.
Houston-based Continental Airlines spun off its regional carrier, ExpressJet, last year and used $100 million of the money raised to cover shortfalls in its pension plan.
Continental's experience "has a bunch of airlines thinking about doing the same thing," Mr. Mann said.
But selling Eagle shares might not be as easy for AMR as cashing a check, say consultants and Wall Street experts with experience in initial public offerings.
"If Eagle's numbers aren't pristine in every respect, then it's going to be a very difficult sell," said David Menlow, president of IPO Financial Network, where he scouts new public offerings. "This has really become a buyers' market."
Airline consultants also say the market might have had its fill of regional airlines.
ExpressJet stock is lagging below its original selling price of $16 a share. Northwest Airlines also hasn't followed through on a plan to sell shares of its regional carrier, Pinnacle Airlines, to the public.
One problem is that not all regional carriers are doing as well as Eagle. Their revenues are almost always linked to the fortunes of their bigger partners.
Atlantic Coast Airlines' marriage to United Airlines, for example, became a liability when the nation's No. 2 carrier filed for bankruptcy in 2002.
As it reorganized, United asked Atlantic Coast to lower its rates, a move that would have cut deeply into the regional carrier's profits.
The regional carrier refused and instead announced a plan to operate independently out of Washington's Dulles International Airport. Wall Street didn't react favorably, and Atlantic Coast's shares tumbled by more than a third.
Eagle's ties to American could hurt how its stock would fare, Mr. Menlow said.
"The health of the parent company and the intentions of the parent company would be key factors," he said. "If the deal is viewed as an effort to shore up the balance sheet of AMR, it's going to be difficult."
The company lost more than $5.2 billion in the last 2 ½ years, though it appears to have stanched the fiscal bleeding this summer. What's less clear is how AMR will fare in the fall and winter – when airline revenues traditionally slump.
"I don't think AMR needs the cash as much as they did before – they've improved their position this summer," said airline analyst Ray Neidl of Blaylock & Partners. "A spinoff is something I've suspected they'd do for a couple of years, but I think they can get a better price for it if they wait."
What's it worth?
It's tricky to calculate what Eagle might be worth. Mr. Bowler, the carrier's president, projects Eagle's 2003 revenue at about $1.5 billion, but that doesn't tell the whole story.
Some industry experts look to Continental's experience with ExpressJet for hints. ExpressJet's current market value – the number of shares multiplied by the price – is $900 million, and a number of analysts suggest Eagle could be worth more.
"That's the shortcut way to come to a value, by looking at ExpressJet," said Barbara Beyer, president of aviation consulting firm Avmark Inc.
The true value could vary by hundreds of millions of dollars. And how much AMR would see from the sale would depend on how much it wanted to sell. Continental, for example, still owns about half of ExpressJet.
Mr. Bowler, meanwhile, is concentrating on improving Eagle's operations – on-time performance and baggage handling among his priorities – and preparing his employees for the dozens of new jets set for delivery.
"Our passenger service ratings are at the highest point they've ever been," he said.
Eagle also has benefited from American's trouble. The larger airline, seeking to pare costs by $4 billion a year, has cut service by about 15 percent in the last two years, some of which has been transferred to Eagle.
"We'll have lots of opportunities backfilling for American," Mr. Bowler said.
Labor problems
As with any large carrier, Eagle has its share of labor difficulties. Its flight attendants union has been negotiating a new contract since 2001, and Eagle asked a federal mediator last week to intervene.
Bill Hennessey, president of the flight attendants union, describes the talks as going "poorly."
Eagle's pilots union also has complained about what it says is management's lack of respect.
"One of the most frustrating parts of our relationship seems to be the inability to be constructive," said Dave Ryter, vice chairman for the chapter of the Air Line Pilots Association that represents Eagle pilots.
"Over at American, before they put out a change in a manual they'll engage the union and say to them, 'Take your safety guys and tell us what you think of them,' " Mr. Ryter said. "Here, we find out about changes the day after our pilots find out about them because we can't ever seem to engage in a constructive atmosphere."
Pilots union officials say they aren't concerned with the effect of a potential sale on their jobs, but the uncertainty around it unnerves many of their members. "It's something that AMR is always telling us is on the table," union president Herb Mark said.
Will AMR look to sell? Company officials aren't saying either way.
"We don't speculate about hypothetical scenarios," said Gus Whitcomb, spokesman for AMR and American.
BOLD ADDED BY MODERATOR
E-mail [email protected]
