American Eagle Ascends Under the Radar

For several years now, this Fort Worth airline has been one of the nation's fastest-growing carriers, and it's profitable, too.

But you won't hear it hyped on Wall Street or touted on magazine covers like high-profile discounters JetBlue Airways or Dallas-based Southwest Airlines. It doesn't advertise, and you can't even buy a ticket directly for its flights.

Nonetheless, quiet regional carrier American Eagle, owned by Fort Worth-based AMR Corp., has moved into a crucial position aiding the recovery of its partner, American Airlines. It's developed a financial footing that would be the envy of many larger airlines, posting a $49 million profit last year, while the industry overall lost billions. Along the way, a growing number of Dallas/Fort Worth Airport passengers are flying on Eagle, even to some far-flung destinations.

And the airline remains a financial ace in the hole in case AMR is pushed to the brink of bankruptcy. Analysts predict that if necessary, Eagle could fetch hundreds of millions of dollars - even as much as $1 billion - if its parent company needs to raise cash fast.

"We are a different company than we were just a few years ago," said Peter Bowler, Eagle's president.

This summer, Eagle, which has 12,000 employees, including 3,000 workers in North Texas, accepted the last of 236 new small jets that it began adding to its fleet in 1998. The airplanes have powered the airline to growth averaging 20 percent a year, even as American significantly slowed the expansion of its domestic schedule.

And Eagle has added scores of new destinations from D/FW, including routes to distant cities such as Chihuahua, Mexico. Just this month, Eagle announced new service to Chattanooga, Tenn.; Rochester, N.Y.; and Syracuse, N.Y. - all considered long-haul flights.

Eagle's D/FW operation grew by 35 percent in June, and it was the airport's second-largest carrier, after American.

This year, AMR executives estimate that Eagle will carry 20 million passengers, up from 14 million two years ago.

Eagle accounts for about 5 percent of AMR's total flying, according to the most recent traffic statistics.

Like other carriers, AMR is using Eagle's small planes, with 50 seats or fewer, to provide frequent flights on routes that don't justify full-size jets. They can serve markets that remain untouched by low-fare competition - and thus command higher airfares than for other routes. And while it continues to feed American Airlines hubs at D/FW, Chicago and Miami, Eagle is also increasingly carrying nonstop passengers on city-to-city routes.

Eagle pilots and flight attendants also earn significantly less than their American counterparts, which keeps the regional carrier's labor costs low. The airline has signed new labor contracts with all of its major employee groups except flight attendants in the past 12 months. A tentative contract with attendants was reached last week and still needs to be ratified by members.

"This is part of a definitive shift by the big carriers," said Alan Sbarra, an aviation consultant with Roach and Sbarra Airline Consulting in San Francisco. "They're seeing the regional airlines as a way to solve part of their financial problems."

But the strategy has risks as well. Because they carry fewer passengers, in some ways small jets are less cost-effective than their larger counterparts, analysts say, and generally rely on higher fares to be profitable. If discount airlines move into regional markets, they could cut quickly into those profit margins.

JetBlue has vowed to do just that. The New York-based airline has ordered smaller 100-seat airplanes from Embraer, and executives say they plan to deploy them in small cities that so far have not benefited from much discount competition. If JetBlue is successful, other discount carriers could follow suit.

"If you see low fares in those markets, it could be a disaster" for the regional airlines, Sbarra said.

And some American Airlines union leaders worry that growth at Eagle represents lost opportunities for employees of the main airline.

"There is a perception among most of the pilots that this comes at our expense," said Ralph Hunter, an American pilot who is president of the Allied Pilots Association.

Financial backbone

AMR doesn't break out Eagle's financial information. But many details of the airline's performance are included in reports Eagle files quarterly with the U.S. Department of Transportation.

They outline an airline that appears to be doing better than its larger sibling.

Last year, Eagle reported a profit of $49 million on revenue of $1.4 billion. Revenue was up 28 percent from 2003, although net income was down.

That compares with an overall $761 million loss for AMR. Separately, American Airlines reported an $821 million loss to the Transportation Department.

Eagle also performed well during the first quarter of this year, reporting a $7 million profit on $404 million in revenue. American, meanwhile, posted a $171 million loss.

"The regional airlines are the ones making the money right now," said Ron Kuhlmann, vice president of Unisys R2A Transportation Management Consultants, a Hayward, Calif., aviation-consulting firm.

Bowler cautions that the financial data reported to the government don't tell the whole story. He said the data do not include the results of Executive Airlines, a small regional carrier owned by AMR that flies under the Eagle name in the Caribbean.

And like most regional airlines, Eagle does not make 2money directly from passengers. American pays Eagle a predetermined rate for each takeoff and landing. That means American handles ticket sales, marketing and other services aimed at bringing passengers to the airline - costs Eagle doesn't have to worry about.

It's the industry standard for how regional airlines are reimbursed, and American switched to this method last year, largely so that Eagle could be compared to its peers.

Eagle owns its airplanes, which means it doesn't have to account for lease payments like many other regional airlines.

But analysts say that regardless, Eagle has clearly been a bright spot for AMR amid the industry turbulence of the past few years. And AMR has an advantage because it owns Eagle outright instead of contracting with independent carriers.

"American is doing some things very well right now, and that includes Eagle," Kuhlmann said.

New airline, same mission

In many ways, Eagle's turning point was in April 2003, when American Airlines union members approved a concessions package valued at $1.6 billion. Although cuts in salaries and benefits garnered the most attention, a key provision in the new contract with pilots loosened some restrictions on how Eagle operates.

Under those rules, Eagle's growth had been frozen in late 2001 when American began to furlough pilots. That left Eagle unable to expand when rivals like Delta Air Lines began substantially increasing their use of regional jets.

"That was a significant change," Bowler said. Unfettered, Eagle was able to use its 50-seat regional jets to fly longer routes that didn't have enough demand to justify full-sized American Airlines jets.

Eagle has also been flying more nontraditional routes. For example, it operates a New York-to-Washington, D.C., bus8iness shuttle, competing with Delta and US Airways.

But Bowler maintains that overall, Eagle's purpose remains the same - to feed passengers into American Airlines hubs in D/FW, Chicago and Miami.

"Our mission has stayed consistent, to support American Airlines' network," he said. About 50 percent of Eagle's passengers connect to American flights, according to Bowler. That number is even higher at D/FW, he said.

He said that Eagle provided $350 million in connecting revenue to American during the second quarter of this year.

Even as it feeds the network, Eagle's newer airplanes have allowed its reach to grow substantially. That's helped the airline become a major international airline at D/FW Airport, with nonstop service to several Mexican cities.

American's pilots, however, aren't particularly happy with the growth at Eagle. Hunter of the American pilots union acknowledges that Eagle is needed to feed American's hubs.

But he adds that most pilots believe that growth at Eagle comes at the expense of American and the large carrier's pilots.

"Eagle was established to feed American, and they have drifted well outside of that mission," he said.

Eagle pilots, meanwhile, say the carrier's expansion has been a mixed bag. Many value the opportunity to fly jets instead of turboprops, and pay and benefits have improved somewhat since their contract was amended last year.

But most pilots joined Eagle with hopes of moving to American. Today they face the prospect of spending far more time at the regional carrier than originally intended. That's because American's growth has stalled, and fur8loughed American pilots are first in line for any new jobs.

For example, in their most recent round of contract talks, union leaders made a priority of improving retirement benefits. Previously, few Eagle pilots had worried about retirement, because they planned on moving to American soon and accessing that airline's pension plan.

"A significant portion of our pilots are now realizing that they're going to be retiring from this carrier," said David Ryter, an Eagle pilot who is vice chairman of that airline's chapter of the Air Line Pilots Association. "That didn't used to be the case, and that can be frustrating."

Ace in the hole

One significant difference between Eagle and most other regional airlines is its status as a wholly owned subsidiary of AMR. Other airlines contract with independent carriers for most of their regional service.

That relationship allows American and Eagle to coordinate more smoothly, Sbarra said.

"It's a completely integrated operation," he said. "That's more difficult when you have an independent regional partner."

It also means that Eagle is an asset that can be sold or spun off to investors if AMR needs to raise cash. Airline executives rejected that option in 2003, even as AMR flirted with filing for bankruptcy protection.

Since then, a sale has seemed less likely as AMR's bottom line has stabilized. But Delta Air Lines' recent sale of its regional subsidiary Atlantic Southeast Airlines to SkyWest for more than $400 million showed how cashing in can provide breathing space even for a cash-strapped carrier.

It's unclear how much Eagle - the largest regional airline - could fetch on the auction block, but the price could be as high as $1 billion, analysts say.

Regardless, Bowler said, Eagle will remain an important part of American's operation, even if operating as a separate company in the future.

"We think Eagle is the right size, and has the right priorities, for what we want to accomplish," he said.

Fort Worth Star Telegram




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