AMR Said to Plan on American Keeping Debt to Aid Eagle

(Corrects seventh paragraph to show debt is greater than aircraft value in story published Aug. 4.)

AMR Corp. (AMR) may give the American Eagle regional unit a better chance of success in a spinoff under a plan to leave the planes and more than $2 billion in associated debt at American Airlines.

American will keep the debt and lease aircraft to Eagle for a token amount, said a person with knowledge of the terms who wasn’t authorized to speak publicly. Fort Worth, Texas-based AMR has said it will give details in a regulatory filing this month.

Eagle’s viability is important for American because the small carrier now provides 95 percent of the bigger airline’s regional passenger feed, and bringing in new partners would take months or years. A clean balance sheet would let a stand-alone Eagle cut operating costs, said Jeff Straebler, an RBS Securities Inc. debt strategist in Stamford, Connecticut.

“If American is putting the planes on their books, that’s an American issue,” Straebler said in an interview. “It’s no longer an Eagle issue. It becomes a different story versus a regional operator that is taking on the risk of the aircraft.”

Ed Martelle, an American spokesman, declined to comment on a stand-alone Eagle. While AMR’s board approved the divestiture through a planned spinoff, American hasn’t shared specifics such as how much Eagle stock would be awarded for each AMR share. It has said the distribution probably would be this year.

Shrinking Expenses

Separating from Eagle is aimed at paring expenses by letting American seek cheaper commuter-flying contracts, including with Eagle. American, the third-largest U.S. airline, has the industry’s highest labor costs, helping drag AMR to three straight annual losses. AMR is the only major U.S. airline company that will report losses this year and in 2012, based on analysts’ estimates compiled by Bloomberg.

Debt associated with Eagle’s fleet is $2.5 billion, according to an AMR regulatory filing. That’s more than what the planes are worth, said the person with knowledge of AMR’s Eagle plan.

No mainline airline has spun off a regional unit and kept planes and debt, said the person, noting that commuter carriers such as Continental Airlines’ ExpressJet Holdings Inc. (XJT) became independent through initial public offerings.

Eagle’s pilot union told members in a July 19 hotline message that American had agreed to take ownership of the regional carrier’s 302 planes, without mentioning the debt. The union is part of talks between American and Eagle on a new flying contract that will set details such as rates.

American’s Future

“With this deal, American has some understanding of where they are going to be five years from now and Eagle has a chance of being a stand-alone company,” said Mike Boyd, president of consultant Boyd Group International Inc. in Evergreen, Colorado.

AMR’s struggle to match U.S. rivals in returning to profit has weighed on the stock, with a 49 percent decline in 2011 through yesterday making the company the worst performer among 11 carriers in the Bloomberg U.S. Airlines Index.

In Eagle’s fleet, 72 percent of the planes have 50 or fewer seats, a size that has fallen out of favor as fuel prices have climbed.

“For the regional business as a whole, the 50-seaters are an albatross with fuel at these costs,” Straebler said. Jet fuel for immediate delivery in New York Harbor averaged $3.17 a gallon last quarter, 47 percent more than a year earlier.

Eagle hasn’t been able to add more 70-seat or larger jets to its fleet because of limits set in American’s pilot contract. The spinoff would allow Eagle to operate bigger planes as it seeks contracts with other airlines.

Eagle’s Results

AMR has never broken out financial details for Eagle, whose $2.33 billion in 2010 revenue was about 10 percent of the parent company’s total. Eagle rose to 11 percent of AMR sales in the first half of 2011, and Chief Executive Officer Dan Garton said July 20 the unit has been profitable.

Industry history shows the challenges facing regional units that once flew for a single, larger partner.

Continental sold stock in ExpressJet in 2002 and got rid of the last of its stake in 2007. After deciding to operate flights under its own name, ExpressJet posted three straight annual losses and was bought by SkyWest Inc. (SKYW) in August 2010 for $133 million.

Mesaba Airlines, whose former parent had a market value of more than $200 million in 2004, fetched $62 million in 2010 when Delta Air Lines Inc. (DAL) sold the unit to Pinnacle Airlines Corp. (PNCL) Delta sold the Compass division to Trans States Holdings Inc. for $20.5 million at the same time.

Pinnacle has fared better following its separation via a 2003 initial public offering from Northwest Airlines Corp., which was bought by Delta in 2008. After a 2008 loss, Memphis, Tennessee-based Pinnacle reported profits in 2009 and 2010. With 283 planes, it is similar in size to a stand-alone Eagle.

“If they can break away without debt and without aircraft ownership costs, they probably could get financing for new aircraft to go after new contracts,” Ray Neidl, a Maxim Group LLC analyst in New York, said of Eagle. “It’s a big job, but it’s a doable job. They have a solid franchise, but it needs a lot of polishing.”

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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