American Airlines recently announced the retirement of the current CEO at American Eagle and then announced that Dan Garton, current EVP of Marketing at AA will become CEO of American Eagle (while initially retaining his duties as EVP.)  Then they announced their intention to revisit the sale of American Eagle.

I can understand why since American Eagle is probably undervalued presently as a business and its sale would refill the coffers at American nicely.  Analysts and shareholders want to see some financial action at American and this is a good way to provide it.

However, it might be a bit of folly too.  Just because it is undervalued doesn’t mean it doesn’t have value at American in its present form.  I wouldn’t be a bit surprised to learn that it is bringing a nice load of cash in the form of operating profits that AA isn’t seeing elsewhere.  I wonder if the one time gain is worth the long term loss. 

Operationally, American Eagle is a pretty well run airline and provides a great deal of stability for AA’s regional routes.  Giving that up in favor of potential savings from low bidding regional airlines might have made sense 5 years ago but now I’m not so sure.  It is another case of AA being a bit slow to react and make adjustments to the markets.  If they had went ahead with bankruptcy, quite a few cost issues would be settled and they would be much better positioned against their competition from the SuperLegacies.  If they had sold American Eagle a few years ago, they would have benefited much more from cheaper contracts on regional flying from independent regional airlines. 

Now even independent regional airlines are working hard to raise their revenues from contracts with legacies and the regional routes are becoming more and more competitive.  Keeping American Eagle in house may let them respond better to changes at this point.  Or, at the least, it seems the lesser of two evils. 

Even if they do rid themselves of American Eagle, American Airlines still has fairly restrictive scope clauses in its contract with pilots and that needs to be amended before they can contract to fly larger aircraft on longer routes via any regional airline.  Keeping American Eagle in house and allowing pilots to “flow” between AE and AA might make those scope changes easier to obtain in negotiations and I think that has a lot of value for the future.

Filed under: Airline News by ajax