Can American Eagle Get Off the Ground?

AMR Corp. (NYS: AMR) , which includes American Airlines and American Eagle, is the fourth-largest airline based on number of passengers. This has not helped on the income statement, however, as AMR is showing an operating loss of $722 million through the first six months of 2011. It is also the only major character facing a loss in 2012.

Complicating matters is AMR not ruling out the possibility of seeking Chapter 11 bankruptcy protection to reorganize its labor agreements. Its competitors have used Chapter 11 protection to negotiate better labor deals with the primary airline unions, and AMR is trying to reduce its current labor spending, which equaled 30.9% of sales last year. Since American Airlines began negotiating with its union on Sept. 20, 2006, the share price has fallen off dramatically.


Source: Yahoo! Finance.

Best spinoff since Frasier?
This has prompted Eagle to file a Form 10 with the SEC in advance of a potential spinoff. Eagle is currently profitable, showing an operating income of $67.8 million through the first six months of this year. As part of the spinoff, AMR would provide Eagle with $50 million in cash as a capital contribution and purchase Eagle's aircraft.

AMR and Eagle believe that a spinoff will benefit both companies equally. It would provide AMR with the opportunity to diversify its regional fleet and allow Eagle to offer regional flight services to other mainline carriers. Both companies would be able to allocate their own resources, and investors would be able to value the two companies separately, based on their unique places within the airline industry.

While American Airlines has been negotiating with its unions since 2006, Eagle has a history of positive labor relations with its unions, both for aircraft crew and ground crew. The past does not predict future outcomes, but Eagle has a much stronger labor foundation on which to build its business going forward.

Breaking up is hard to do
As part of the spinoff, Eagle and AMR will enter into three agreements that will provide American with a substantial amount of its revenue in the beginning. One agreement will be for Eagle to provide regional flights for American Airlines for nine years. Second, they will enter into an eight-year agreement for ground operations for all American Airlines flights. Finally, they will enter a 16-year agreement to use AMR facilities at airports across the country.

These agreements will provide Eagle with an immediate revenue stream, but as with any company that derives most of its revenue from one customer, Eagle's reliance on American Airlines does pose a risk. American has experienced significant losses in recent years. If American continues to lose money and is unable to fulfill its end of the agreements, it will make it difficult for Eagle to remain liquid.

A beneficial relationship
Eagle will hopefully be able to expand beyond these agreements with American. Eagle possesses two operating certificates, providing the flexibility to fly for airlines beyond American. The FAA forecast that regional capacity will grow an average of 4% annually through 2030. In addition, Eagle estimates that 14 aircraft contracts for regional flight operations will expire through 2016. This should provide the company with opportunities to win additional business routes in the medium term.

A regional leader
Eagle is currently the third-largest regional airline based on number of planes operated, and the largest regional airline at Dallas/Fort Worth Airport, LaGuardia, Chicago O'Hare, and Miami International. Its ground handling operation provides services at more than 100 airports to 13 airline customers besides American, including being the only provider of ground handling services to all scheduled airlines at 12 of those locations.

Southwest Airlines (NYS: LUV) , a bit too big to truly be considered a regional airline, leads the nonmajor carriers and flies similar routes to American Eagle. One major difference is that it does it in larger Boeing 737s, while American Eagle flies smaller, lower-capacity aircraft.

SkyWest (NAS: SKYW) , the parent of Atlantic Southeast Airlines and ExpressJet Airlines, operates regional flights for Delta Airlines (NYS: DAL) , Alaska Air Group (NYS: ALK) , and United Continental (NYS: UAL) , and is Eagle's major national competitor, with Air Wisconsin operating flights for US Airways (NYS: LCC) out of the Midwest.

What does this mean for you?
All this is subject to certain conditions, including SEC clearance, IRS approval, and approval by AMR's board of directors. While AMR has taken this step toward a spinoff, it could decide to retain Eagle or sell it.

Because the majority of Eagle stock would be issued directly to AMR stockholders, you have to purchase AMR shares to get Eagle from the beginning. Add AMR to your watchlist to know if and when the Eagle spinoff has been completed and to keep an eye on these exciting developments.

At the time thisarticle was published Foolish contributorRobert Eberhardhas no financial interest in any companies mentioned here. Follow him on Twitter@GuruEbby.Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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