Friday, February 15, 2013

American Eagle Sees Room for Consolidation

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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