February 15, 2013, 3:18 p.m. ET
By DOUG CAMERON
The Wall Street Journal
The
U.S. regional-airline industry could be set for more consolidation in
the wake of deal-making among network carriers, according to the head of
AMR Corp.'s American Eagle commuter unit.
A long-planned spinoff
of American Eagle also remains a possibility even after the planned
merger of American Airlines parent AMR and US Airways Group Inc., though
Eagle Chief Executive Dan Garton said the initial priorities are
developing a new aircraft-fleet plan and exploring how the partners'
regional operations can be "blended."
Regional airlines are the
backbone of the U.S. domestic-airline industry, expanding rapidly over
the past two decades to account for just over half of all passengers,
feeding them to big hubs such as Chicago O'Hare and Dallas-Fort Worth
from smaller airports.
American Eagle is the largest regional
carrier wholly owned by a U.S. network airline, and last year it
accounted for 95% of the domestic passengers fed onto American's
flights.
That is far more than American's rivals, most of whom
have already outsourced the bulk of their commuter flying to companies
such as market leader SkyWest Inc. and Republic Airways Holding Inc.
The
regional airlines purchase most of aircraft and fly with their own
crews, while the network carriers dictate where they operate and provide
marketing, reservations and jet fuel.
The fierce competition
among regionals to fly on behalf of carriers such as United Continental
Holdings Inc. or Delta Air Lines Inc. keeps the network airlines' costs
down, but also generates razor-thin profit margins that has forced many
to seek bankruptcy protection or even close altogether.
"I would
be very surprised if we were done with regional consolidation," said Mr.
Garton in an interview, citing the potential economies of scale from
purchasing aircraft and cutting overheads.
Mr. Garton first led
American Eagle in 1995, returning to the helm in 2010 after spells at
Continental Airlines and American Airlines. He said there was still
plenty of scope for more deals that would cut overheads and generate
economies of scale in, for example, buying aircraft.
He recalled
that when 20 years ago he first served as chairman of the Regional
Airlines Association, a trade group, there were some 100 carriers flying
for bigger carriers. His second spell two years ago saw that number
shrink to 20.
"That's still a lot of players," he said.
AMR's
heavy reliance on doing almost all of its flying in-house has started
to change, leading to deals with SkyWest and Republic in recent months
to fly under the Eagle brand.
US Airways owns two commuter units,
PSA Airlines and Piedmont Airlines, and also outsources flying to other
companies using the US Airways Express brand.
The airline said
this week that it would retain PSA and Piedmont and keep them separate
from American Eagle, though eventually use the Eagle brand for all
regional flying.
Mr. Garton said it wasn't necessary to combine the three commuter units straight away.
AMR
and US Airways expect to secure extra revenue by linking their
respective hubs, much of which will be done simply by putting common
flight numbers on commuter flights.
Their in-house regional units
are also geographically distinct, with PSA and Piedmont focused on the
East Coast and flying routes that are typically shorter than those flown
by Eagle, which is concentrated in the Midwest and South.
Mr.
Garton has been a strong proponent of spinning off Eagle to reduce AMR's
reliance on the unit, cut costs and provide other opportunities for the
business to expand. The plan was well advanced before AMR filed for
bankruptcy protection in November 2011.
He said Friday that a
decision whether to spin off Eagle was "down the road" following a
broader review of the enlarged American's regional business. While it
was not "infeasible" a decision could be made this year—the merger is
due to close in the third quarter—issues such as the need for regulatory
filings would likely push any separation beyond that timeframe.
A person with direct knowledge of US Airways' plans said thoughts of spinning off Eagle were not "dead."
Eagle's
immediate priority is to change its aircraft fleet, moving away from
the smaller jets with 50 or fewer seats that spurred the surge in the
regional sector's expansion when they were introduced at the start of
the last decade.
Soaring fuel costs have now made them uneconomic to fly on many routes. Delta is dropping hundreds of them.
"We
have way too many 37- and 44-seaters, maybe even 50-seaters," said Mr.
Garton, though added that keeping some of the latter was "justified" to
provide extra frequencies on smaller routes.
Eagle's pilot
contract allows for the flying of aircraft with up to 76 seats, with
anything larger operated by the mainline American unit, whose staff
receive higher pay and benefits.
Source: http://online.wsj.com
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