American to keep Eagle's 2 billion plus debt

[commavia]

It's the smart, financially prudent step for AMR to take at this point. The debt is already on the balance sheet today as it is, and contrary to what certain other posters have said, you can't just "write it off." Eagle is marginally profitable, but ultimately an economic dead-end that cannot be viable today given the limitations placed on it by the burdens of legacy costs and union restrictions. As such, it's better for AMR to cut its losses and cut Eagle loose now then to wait any longer - if keeping the debt on the books (again, no change from what the situation already is today) is the price for getting rid of Eagle, than it's worth it to AMR.

Management should have spun Eagle off at the peak of the boom around 2006/2007, when Continental spun off ExpressJet - but it didn't happen. In my view, that is one of the single biggest AMR management strategic mistakes of the last decade - along with not keeping a stronger focus on AA's post-TWA lead at JFK. But, alas, today is here and this is what is now reality for the company.

Bottom line: Despite the fervor and intrigue whipped up here and elsewhere by certain elements, AMR has somehow managed - despite all the dire predictions otherwise - to service its debt as a going concern, something no other U.S. legacy carrier has been able to do - perhaps, just perhaps, AMR will be able to continue to live up to the obligations its made to debt holders. Management obviously feels that the going-forward balance sheet impact of keeping about $2B of debt on the books outweighs the going-forward net cost of keeping Eagle. I tend to agree.

 

[chris perry]

So what you guys are saying is Eagle's RJ's have been a total failure. This company went to great lengths to dodge the scope language.... what happend to the 37 seater's special built ? Are they gathering dust in the desert? I always refered to RJ's as bic lighters.... Nice aicraft but built for corporate world not passenger service. Crandal said during bad times aircraft need to be larger less frequent service...... Yet ordered these scope airplanes,I guess we were keeping up with the jones.....Now stuck with payments ,sounds like a helluva deal.

 

[commavia]

So what you guys are saying is Eagle's RJ's have been a total failure. This company went to great lengths to dodge the scope language.... what happend to the 37 seater's special built ? Are they gathering dust in the desert? I always refered to RJ's as bic lighters.... Nice aicraft but built for corporate world not passenger service. Crandal said during bad times aircraft need to be larger less frequent service...... Yet ordered these scope airplanes,I guess we were keeping up with the jones.....Now stuck with payments ,sounds like a helluva deal.

RJs weren't a "total failure." It's just that business changes - I would think union members would know and understand that better than anyone. That's why the key in the airline industry especially (though really in any industry) is flexibility and rapid adaptability.

Airline managers - and certainly not just at AMR - were making decisions back in 1998, 1999, 2000, etc. based on the best information they had in front of them at the time. At the time, all the legacy carriers were rapidly moving from props to jets due to customer preference, and the belief that this preference would ultimately drive higher yields for the airlines that could differentiate their regional flights with jets. That is the reason why all the legacy carriers spent billions buying hundreds of regional jets. The flaw in that logic ended up being that that the higher yields didn't ultimately happen because the differentiation never materialized when everyone had the same RJs. But, of course, the main reason RJs didn't work was because a jet aircraft that can at most carry 50-70 revenue-generating seats around simply cannot make money at $100+ oil - it was never designed to. Virtually nobody back then thought that within a few years, fuel prices would have tripled.

Thus the reason why now AMR is trying as quickly as it can to exit this segment of the market wherever possible. AMR is trying to get rid of Eagle, which is today oriented nearly-entirely around flying 44-50-seat regional jets, so that it can diversify its regional feed - ultimately to lower-cost operators. And AMR is also wants to be competitive with other U.S. legacy carriers - especially Delta - where SCOPE provisions are far more liberal, and those airlines' regional operators are flying far more 70-90-seaters around.

My personal belief - as I've argued numerous times - is that the APA should agree to substantially lower (than mainline) wages to fly 70-90 seaters, in exchange for a guarantee from AMR that all 70-90-seat flying be done by APA pilots. The precedent this would set - for AA pilots, and the industry - would be massive: agree to base pay scales that are roughly comparable to what 70-90-seater pilots are getting paid at JetBlue, Delta Connection, and USAirways Express, and in return keep those pilots in all of the same APA/mainline pension and benefit schemes. That way, net-net, the pilot costs are roughly on-par (say, only 5-7% higher) with the often non-union pilots at competitors, but there is no B-scale.

To me this just seems like a logical win-win for everyone: company gets the ability to fly more aircraft in one of the fastest-growing market segments, and APA locks in work and effectively guarantees that the company cannot set off the mainline vs. regional pilots in the future.

 

[will fix for food]

My personal belief - as I've argued numerous times - is that the APA should agree to substantially lower (than mainline) wages to fly 70-90 seaters, in exchange for a guarantee from AMR that all 70-90-seat flying be done by APA pilots. The precedent this would set - for AA pilots, and the industry - would be massive: agree to base pay scales that are roughly comparable to what 70-90-seater pilots are getting paid at JetBlue, Delta Connection, and USAirways Express, and in return keep those pilots in all of the same APA/mainline pension and benefit schemes. That way, net-net, the pilot costs are roughly on-par (say, only 5-7% higher) with the often non-union pilots at competitors, but there is no B-scale.

To me this just seems like a logical win-win for everyone: company gets the ability to fly more aircraft in one of the fastest-growing market segments, and APA locks in work and effectively guarantees that the company cannot set off the mainline vs. regional pilots in the future.

The pilots are just one part of the equation. I doubt the company would bite on that unless all the other work groups were paid as much as their regional counterparts. What about it Bob? Would you and your coworkers accept a 12 year $26/hour payscale to capture the regional flying?

 

[WorldTraveler]

no, actually AMR has NOT paid all of its debts as much as some people want to believe. They engaged in a debt for equity swap as part of the 2003 out of court restructuring.... they attempted to use the exact same process that occurs in bankruptcy. To argue that AMR has paid all of its debt in full is simply factually incorrect.
.
The BK process is a debt for equity swap process as well... the difference is that the equity is in the NEW company... which is probably why in part that AMR received such a tepid response to its debt for equity... because creditors recognize that simply giving up a little debt w/o changing the fundamentals of the business makes it highly unlikely the stock value will appreciate.
You need only look at the ratings on AMR's debt vs the rest of the industry and the value of AMR's stock - also compared to the rest of the industry - to determine whether AMR's 2003 restructuring was successful.... it clearly was not and managment has been incredibly slow to come up with that realization and to recognize the strategic changes that had to occur.
>
And yes companies can absolute write off whatever debt they have... the term doesn't mean that you make it go away but instead means that the underlying asset cannot support the value of the debt..... and that is precisely why AMR could not sell Eagle and why the only way they can create any value in a spinoff is to retain the debt.
.
It is perfectly clear that the only way AMR can get out from under the obligations of Eagle is to write it as an accounting term but continue to be saddled with the debt or file for bankruptcy and then reject the aircraft and the leases..... anyone that thinks that AMR can continue to pile on debt while losing money need only look toward Washington.
The US' inability to control costs and manage its debt is precisely why the global financial community is up in arms - and why the implications of a debt downgrade have ENORMOUS implications for the US as a country and for companies throughout the US.
The rating on the US' public debt absolutely affects how corporate debt will be viewed and the airline industry - long one of the most vulnerable and fragile industries - will be affected - and the weakest companies in the sector will be disproportionately hurt first.... and right now AMR Corporation is the weakest large company in the US airline sector.
.
Yes, AMR missed the strategic opportunity years ago to fix Eagle's costs and that failure continues to hurt AA's bottom line in terms of the price AA has to pay for regional carrier feed.
But combined with AA's own financial woes which have nothing to do with Eagle, the ability for competitors to erode AA's core revenue base continues - and that was completely evident in the latest quarterly financial reports - just as they have been for over a year. AA's core business revenue is under enormous attack from competitors, esp. DL and UA, and AMR's RASM underperformance demonstrates that fact.
AA and AMR has no choice but to exit markets because it cannot successfully compete in those markets - weakening AA's network and providing even more opportunities for competitor inroads.
Eagle is part of the problem but it is far from the total - and there appears to be no more of a solution for AA to stop the bleeding, let alone return the patient to health by regaining lost ground - anytime soon.
.
BTW, I believe that AA will add mainline JFK-BOS, not LGA-BOS service, meaning that AA will be the only legacy carrier that does not have air service between BOS and LGA or EWR which are the two most preferred business airports for NYC. The JFK-BOS flights will serve only to feed the international operation and perhaps connect to B6's domestic operation at JFK where AA/AE can no longer compete - at the same time that AA continues to pull down its position in BOS where it was the largest US network until just a couple years ago.
.
Given the current economic climate, AA mgmt is dealing with their strategic problems in a manner similar to fighting a five alarm fire with water pistols.

 

[commavia]

The pilots are just one part of the equation. I doubt the company would bite on that unless all the other work groups were paid as much as their regional counterparts.

Very fair point - and I don't pretend to know the "right" answer. But it does seem to me that this would be a major opportunity for AMR's labor unions to set a pretty stunning precedent for the industry.

AMR's competitors have used the bankruptcy process - sometimes repeatedly - to involuntarily default on obligations to debt holders, renege on pension commitments, abrogate union contracts, and outsource massive amounts of their business. This has put AMR at a substantial competitive disadvantage in a wide variety of areas - one of them being regional operators. Delta's SCOPE language, for example, is far more liberal about regional operations and thus Delta (and United) generate far more of their system ASMs from non-owned regional operators. United eliminated all of their 733/735 mainline flying - most of it passing to UAX CRJs; Delta is continuing the process of shifting much of their former 733/DC9 flying to RJs as well. This is work that, in the last decade, has completely gone out the door at these airlines, and is no longer available for mainline labor, and is now being down by regional operators working at far-below-mainline pay and benefit scales. AMR's SCOPE is far more restrictive, and as such, the vast majority of this work - both flying done by pilots and flight attendants, and maintenance done by AMTs - is still done by AA mainline, in-house.

If AA and the unions were able to work out some sort of a "grand bargain" that effectively saw AA - mainline - operating just about all of the capacity within the entire AMR system (excepting perhaps RJs or props below, say, 51 seats), it could have a profound impact on the course of labor negotiations and business models not just at AMR but throughout the industry. I definitely don't know what the right "bargain" would be to make the economics of such a proposal "close," but I personally continue to believe a deal like that could be workable - long-term - for both sides, and would be a brilliant masterstroke strategically for AA and its unions.

 

[Frank Szabo]

... snip

You need only look at the ratings on AMR's debt vs the rest of the industry and the value of AMR's stock - also compared to the rest of the industry - to determine whether AMR's 2003 restructuring was successful.... it clearly was not and managment has been incredibly slow to come up with that realization and to recognize the strategic changes that had to occur.

Bean counters/CPAs are a stodgy sort that use crowbars to put on their starched drawers - with a group heading a corporation where being nimble is an asset as well as a necessity, what in hell would a personable person expect the outcome to be?

... snip


Yes, AMR missed the strategic opportunity years ago to fix Eagle's costs and that failure continues to hurt AA's bottom line in terms of the price AA has to pay for regional carrier feed. CO did pretty well, though, with their departure from the puddle-jumper business a few years ago.
... snip

Wouldn't have dealing with Eaglet properly in the beginning have required admitting to failure in some degree? Not surprising.

Given the current economic climate, AA mgmt is dealing with their strategic problems in a manner similar to fighting a five alarm fire with water pistols.

Again, to do otherwise would be admitting to failure which, in any normal business operation, would get one an escort to the door - not at AMR, though - BTW, your analogy is excellent but you might have to explain it to AMR's present management as their egos would hamper their ability to comprehend it.

After wearing my tinfoil hat for 7 days non-stop, I am predicting:

When Eaglet is finally spun off and its debt passed to AMR, another round of failure bonuses (in the form of stock for immediate sale) will be authorized by the board of directors and 91 days later (in order for the executives to retain legal rights to said failure bonuses and not have to return them to the "estate"), I predict a Chapter 11 filing or perhaps a Chapter 7 filing, with BA and IB getting first dibs on the pieces with Boeing, perhaps, picking up the maintenance operations, and maybe even starting to run it like a business designed to make a profit.

[sarcasm]

Arpey and Horton will be reduced to bathing in a decorative Forth Worth fountain (the road being paved years earlier by Dan Garton) and byhaps might become CPAs at a not-yet-formed regional airline based in BFE with 4-6 rejected aircraft from Eaglet.
[/sarcasm]

 

[WorldTraveler]

Very fair point - and I don't pretend to know the "right" answer. But it does seem to me that this would be a major opportunity for AMR's labor unions to set a pretty stunning precedent for the industry.

AMR's competitors have used the bankruptcy process - sometimes repeatedly - to involuntarily default on obligations to debt holders, renege on pension commitments, abrogate union contracts, and outsource massive amounts of their business. This has put AMR at a substantial competitive disadvantage in a wide variety of areas - one of them being regional operators. Delta's SCOPE language, for example, is far more liberal about regional operations and thus Delta (and United) generate far more of their system ASMs from non-owned regional operators. United eliminated all of their 733/735 mainline flying - most of it passing to UAX CRJs; Delta is continuing the process of shifting much of their former 733/DC9 flying to RJs as well. This is work that, in the last decade, has completely gone out the door at these airlines, and is no longer available for mainline labor, and is now being down by regional operators working at far-below-mainline pay and benefit scales. AMR's SCOPE is far more restrictive, and as such, the vast majority of this work - both flying done by pilots and flight attendants, and maintenance done by AMTs - is still done by AA mainline, in-house.

If AA and the unions were able to work out some sort of a "grand bargain" that effectively saw AA - mainline - operating just about all of the capacity within the entire AMR system (excepting perhaps RJs or props below, say, 51 seats), it could have a profound impact on the course of labor negotiations and business models not just at AMR but throughout the industry. I definitely don't know what the right "bargain" would be to make the economics of such a proposal "close," but I personally continue to believe a deal like that could be workable - long-term - for both sides, and would be a brilliant masterstroke strategically for AA and its unions.

but once again, AA foisted the exact same pay cuts on AA employees as part of its 2003 restructuring the big difference being that AA employees have seen no return on their investment - other airline employees including DL, UA, and CO before them have had profit sharing and pay increases which flowed from those companies' abilities to actually turn their companies around.
I know it is so American to blame everyone else but the "poor us" attitude because we did the right thing is nothing but a load of manure.... the right thing is to run the business right. AMR hasn't done it in a decade - and they also have engaged in many of the same tactics to cut costs that the other carriers used - the difference being AA did it out of court - alot cheaper with predictably smaller results - while other companies did it in court and accomplished what needed to be done.
.
It may frost you to admit it but DL's pilots have long given the company far more in scope language with RJs - and the company has rewarded the pilots with very aggressive international expansion which is worth far more to the pilots. The fact that DL introduced the 77LR flying 17 plus hour flights, the pilots signed up quickly - and DL agreed that 2 captains was the right thing to do. There was no fight about how to crew those aircraft, the pilots won, the company has expanded, and that was all done without the coercion of bankruptcy. It is labor relations working the way they are intended to do.... and the FAA even decided to use DL's crew management plan for ultralong flying as the standard for the industry - until airlines like AA balked and said DL's moves were too costly - so the 787 is such a mirage on the horizon for AA and the 773ERs might be used on 9 hr flights at best because that might be the weight limit comparable to the 772ER for which AMR has a rate.
.
UA decided to get rid of its 100 seaters because they don't make economic sense... they didn't force the pilots to accept more CR9s because of it... that is what the economics dictated.
>
The fact that DAL and UAL both significantly outperformed AMR in revenue generation as well as overall profits shows the former two companies have the right ingredients to run their networks - and they don't have to sink $2B in order to try to make it right.

.
Yes, Frank, DENIAL is a huge part of the problem at AA/AMR and the reason why the situation continues to rapidly deteriorate is because - just like in Washington - no one wants to fess up that they screwed up 'cause it just might cost them at the feeding trough.

 

[will fix for food]

I'm hearing:

Eagle is spun off.
American files Chapter 11
Eagle continues to fly for American as Eagle with most of the current aircraft
A different certificate is dusted off and is used to start up an E190 operation with a JetBlue type of relationship

 

[WorldTraveler]

I'd say your word is probably pretty close to the truth.... with the leases on the current fleet rejected and then renegotiated for pennies so that AMR can move quickly to find newer, more fuel efficient aircraft ... just like the "other guys" did.
of course there are other "benefits" of BK besides just AE but what is being done by AMR certainly fits with your prognosis.

 

[commavia]

I'm hearing:

Eagle is spun off.
American files Chapter 11
Eagle continues to fly for American as Eagle with most of the current aircraft
A different certificate is dusted off and is used to start up an E190 operation with a JetBlue type of relationship

Eagle will be "spun off" - one way or another. AMR doesn't want to be in that business anymore, which is the right decision to make.

Eagle will continue to fly for AMR for a predetermined period of time - probably five years or something like that. During that time, AMR will lock in with Eagle some fee per departure cost and the AMR-Eagle relationship will continue to function - at least operationally - in much the same way as it does now. After that predetermined period is up, AMR will then be free to compete that regional capacity purchase to any and all operators interested in bidding - Eagle will be just one of many potential vendors. At that point, if they cannot be cost-competitive, Eagle (or whatever the spun off company is called at that point) will probably either cease to exist, or be bought by another airline.

I don't see how AMR can start up an E190 operation using a different certificate - I didn't think that was possible under the current APA language. Either way, if that were - hypothetically - to happen, I highly doubt it would be like the relationship AA/AMR has with JetBlue now. If that hypothetical 90-seater flying was to be American-branded, AMR/AA would want far more control over it. The relationship with JetBlue now is fairly loose - it's essentially just a standard, run-of-the-mill codeshare/frequent flyer relationship (at least at this point).

And as for Chapter 11 - it may happen, it may not. AMR has managed to stay a going concern thus far - they are unique among their peers in that regard. Not filing for bankruptcy and defaulting on obligations has, obviously, put AMR at a competitive and financial disadvantage versus other carriers that have done it (sometimes repeatedly). That's sort of obvious - when your competitors are freezing and/or dumping pensions, abrogating union contracts, tearing up SCOPE, outsourcing overhauls, outsourcing far more of their domestic flying to non-owned regional operators, etc., it only stands to reason that their costs will be lower in many areas. As such, AMR has struggled to operate in an environment where their costs are higher than their competitors. Whether AMR will continue to be able to defy the industry trend remains to be seen - only time will tell.

 

[TWU informer]

and so we must repeat the instructions of the chest thumpers on the previous T/A

VOTE NO!

 

[will fix for food]

name='commavia' timestamp='1312744733' post='819900']
Eagle will be "spun off" - one way or another. AMR doesn't want to be in that business anymore, which is the right decision to make.

I don't think its that AMR doesn't want to be in the feeder business anymore, they just realize that they need access to a 'gap" jet fleet and this is a means to that end.

Eagle will continue to fly for AMR for a predetermined period of time - probably five years or something like that. During that time, AMR will lock in with Eagle some fee per departure cost and the AMR-Eagle relationship will continue to function - at least operationally - in much the same way as it does now. After that predetermined period is up, AMR will then be free to compete that regional capacity purchase to any and all operators interested in bidding - Eagle will be just one of many potential vendors. At that point, if they cannot be cost-competitive, Eagle (or whatever the spun off company is called at that point) will probably either cease to exist, or be bought by another airline.

Garton told our Local president it will be a nine year ASA. There really aren't "many" potential vendors out there. The regional industry has been consolidating. In nine years it might just be Skywest, Republic, and Eagle. At that point the feeder provider will be able to make some serious demands.

I don't see how AMR can start up an E190 operation using a different certificate - I didn't think that was possible under the current APA language. Either way, if that were - hypothetically - to happen, I highly doubt it would be like the relationship AA/AMR has with JetBlue now. If that hypothetical 90-seater flying was to be American-branded, AMR/AA would want far more control over it. The relationship with JetBlue now is fairly loose - it's essentially just a standard, run-of-the-mill codeshare/frequent flyer relationship (at least at this point).

Check out the APA's Chatauqua (or was it Trans States?) grievance and how that played out. It is a model of how I hear it's going to happen. I don't know that the new operation is going to be American branded. I'm guessing the new name will be "Flagship"

And as for Chapter 11 - it may happen, it may not. AMR has managed to stay a going concern thus far - they are unique among their peers in that regard. Not filing for bankruptcy and defaulting on obligations has, obviously, put AMR at a competitive and financial disadvantage versus other carriers that have done it (sometimes repeatedly). That's sort of obvious - when your competitors are freezing and/or dumping pensions, abrogating union contracts, tearing up SCOPE, outsourcing overhauls, outsourcing far more of their domestic flying to non-owned regional operators, etc., it only stands to reason that their costs will be lower in many areas. As such, AMR has struggled to operate in an environment where their costs are higher than their competitors. Whether AMR will continue to be able to defy the industry trend remains to be seen - only time will tell.
[/quote]

They may file, they may not. There certainly are a lot of unusual things going on at work, things I think are pointing to preperations for a filing.

 

[Hopeful]

They may file, they may not. There certainly are a lot of unusual things going on at work, things I think are pointing to preperations for a filing.[/b]

I must say I agree. But people need to understand that a bankruptcy judge will NOT even give us the last final offer by the company. We will be gutted.

People need to understand that.

 

[Tex-Mech]

I'm hearing:

Eagle is spun off.
American files Chapter 11
Eagle continues to fly for American as Eagle with most of the current aircraft
A different certificate is dusted off and is used to start up an E190 operation with a JetBlue type of relationship

I'm hearing the same thing, with the exception being that the APA has already cut a deal to fly the new airline under a "B" scale, and the maintenance and fleet service work would all be outsourced.