AMR shares drop after brief surge
By TREBOR BANSTETTER
tbanstetter@star-telegram.com
After a brief, one-day surge, shares of AMR Corp. descended rapidly Thursday after some analysts said they were skeptical of the long-term benefits of spinning off American Eagle, the company's regional airline.
Shares of Fort Worth-based AMR, parent of American Airlines (ticker: AMR), closed at $20.81 Thursday, down $1.17, or 5 percent. The sell-off, also spurred by an increase in oil prices, erased most of Wednesday's gains, when news of the Eagle deal had investors buying the stock.
"Honestly, I don't know why they're doing it," said Roger King, an analyst with CreditSights, an independent research firm. "I don't see this as being a great value play" for investors.
American executives said Wednesday they hope to divest Eagle next year. They may sell it to another airline or an investment group, or spin it off as a new public company. The move came after one of AMR's largest investors, FL Group of Reykjavík, Iceland, urged the company to sell off some of its assets, such as Eagle, the AAdvantage frequent flier plan, American Beacon investment firm, or American's maintenance operation.
FL Group specifically called on AMR to sell off the AAdvantage program, which the group valued at $4 billion. AMR executives, however, concentrated on Eagle, which most analysts say is worth $800 million-$1.6 billion.
Analysts worried there are no obvious buyers for Eagle, and the airline could face significant challenges as an independent company. It has higher costs than many of its rivals, and would initially be dependent on a single customer, American. The carrier's fleet is primarily comprised of 50-seat regional jets and smaller aircraft, while demand has been growing for larger, more comfortable 70-seat planes.
"We don't view (the) Eagle announcement as highly relevant," said Jamie Baker, an airline analyst for J.P. Morgan, in a research note. He added that he considers it "best viewed as longer-term earnings neutral."
Eagle's top official outlined some of the carrier's challenges in a letter to employees last January. In the memo, sent the day of AMR's annual earnings report, Eagle president Peter Bowler said, "We have a substantial cost gap versus most of our competitors. We trail our competitors in both (on-time performance) and lost bag ratios, and have too many customer complaints."
He also noted "the regional airline industry is changing rapidly, as mainline carriers award their regional flying contracts to low-cost bidders."
Bowler said Eagle had a 3.9 percent pre-tax profit margin in 2006. That failed to reach a goal of 6 percent, he said, "as a result of higher-than budgeted expenses."
Still, Eagle remains a powerful source of revenue for AMR. Last year, the airline carried more than 21 million passengers, about half of whom connected to American flights, according to Bowler.
"When these customers connected from Eagle to AA, they brought with them $1.7 billion in AA revenue in addition to the $2.4 billion in revenue for the Eagle portion of their trips," he wrote.
Baker said it is unlikely another airline would buy Eagle. SkyWest is still occupied with its acquisition of Atlantic Southeast Airlines. And Mesa Air Group and Express Jet "lack the means to finance, in our view," he said. He also said initial public stock offerings of Pinnacle Airlines and ExpressJet haven't been successful. Still, he said, "Eagle is more likely to be spun (off) than sold to a third party."
It remains to be seen how Eagle's 13,000 employees would fare under an independent company. The airline could be forced to slash labor costs thanks to new competitive pressures with leaner rivals like Pinnacle Airlines and SkyWest. And pilots could lose their traditional career path from Eagle to American Airlines.
Union leaders have said it's too early to gauge any deal's impact on employees.
But untethering the airline could also spur growth through contracts with other airlines. That could mean larger airplanes and a bigger fleet.
American executives say they will honor current contracts with pilots, flight attendants, and ground workers. Eagle has about 3,590 employees in North Texas.
AMR could use the money raised from an Eagle deal to pay down debt or fund pensions. But King pointed out that the airline already has a large cash cushion -- about $5.4 billion in unrestricted cash and short-term investments.
"They just don't need the cash," he said.
Baker suggested a sale could serve as an "olive branch" between American management and its pilots union, currently embroiled in a difficult contract negotiation. American pilots have long fought any growth at Eagle, because of fears that the regional airline's lower-paid pilots will perform flights that otherwise would be flown by mainline pilots.
But people close to the airline said labor issues weren't a consideration.
AMERICAN EAGLE FACTS
WORK FORCE
Total employees: 13,000
D/FW employees: 3,590
OPERATIONS
D/FW flights: 288 daily
Fleet: 305 jets
Average passenger load: 78 percent
SECOND-QUARTER FINANCES
Operating profit: $53 million
Net profit: $12 million
Operating profit margin: 10 percent
Sources: AMR Corp., U.S. Department of Transportation
TREBOR BANSTETTER, 817-390-7064
