Eagle Ipo?

[AAviator]

http://biz.yahoo.com/ap/041103/american_job_cuts_6.html

---On another issue, Arpey, who is also chairman and CEO of AMR, said the parent company was still considering selling its investment subsidiary and the commuter airline American Eagle. He added, however, that commuter carriers are profitable while most of the so-called mainline airlines are losing money.----


Man, let someone else pay for those RJ's.

 

[WorldTraveler]

Of course if you sell AE off, you then have to pay for the services they provide. If they are profitable (and they are), it probably makes sense to own them vs. purchase services from another company that owns them.

You are right that if there is an opportunity to sell AE off, AMR could tremendously improve its balance sheet to spinning AE off. However, as Arpey mentions, it makes no sense to do it until the mainline business model is fixed and stable. Also, there will likely be a glut of regional jets in the industry in the near future as legacy carriers start failing, so the value of an IPO for AE would be diminished.

Along with AMR, DAL also has tremendous value tied up in its regional carrier ownership which could help it as well. If AMR and DAL both decide to tap into the value in their respective regional carrier operations, they would have a tremendous advantage that no other carriers in the industry have.

Incidentally, AA and DL both have the most extensive maintenance operations and facilities in the industry and both have not gone down the road of substantial outsourcing as some airlines have done. Using recent DOT data, DL is the lowest cost producer for maintenance services of any of the legacy carriers on its own fleet but AA is in a decent position. Those maintenance capabilities could also be used to either strengthen the balance sheet through an IPO of that dept. or by insourcing to provide additional revenues.

 

[MCI transplant]

Of course if you sell AE off, you then have to pay for the services they provide. If they are profitable (and they are), it probably makes sense to own them vs. purchase services from another company that owns them.

You are right that if there is an opportunity to sell AE off, AMR could tremendously improve its balance sheet to spinning AE off. However, as Arpey mentions, it makes no sense to do it until the mainline business model is fixed and stable. Also, there will likely be a glut of regional jets in the industry in the near future as legacy carriers start failing, so the value of an IPO for AE would be diminished.

Along with AMR, DAL also has tremendous value tied up in its regional carrier ownership which could help it as well. If AMR and DAL both decide to tap into the value in their respective regional carrier operations, they would have a tremendous advantage that no other carriers in the industry have.

Incidentally, AA and DL both have the most extensive maintenance operations and facilities in the industry and both have not gone down the road of substantial outsourcing as some airlines have done. Using recent DOT data, DL is the lowest cost producer for maintenance services of any of the legacy carriers on its own fleet but AA is in a decent position. Those maintenance capabilities could also be used to either strengthen the balance sheet through an IPO of that dept. or by insourcing to provide additional revenues.

[post="197693"][/post]​

<_< World----- For whatever reason, a.a. either has no interest in 3rd party work, or hasn't a clue as to how to profitable manage such work! I could be totally wrong, but from where I'm at today, we've seen nothing to make us think anything else! :down:

 

[AAviator]

Worldtraveler,

Could you please explain this?

I pulled this info from the SEC filing, and can't seem to see profitability at AE without a hefty subsidy from AMR. Line 16... from
http://biz.yahoo.com/e/041021/amr10-q.html
For the Three Months Ended September 30, 2004 and 2003

Revenues

The Company's revenues increased approximately $157 million, or 3.4 percent, to $4.8 billion in the third quarter of 2004 from the same period last year. American's passenger revenues increased by 0.9 percent, or $33 million, on a capacity (available seat mile) (ASM) increase of 3.5 percent. American's passenger load factor increased 1.9 points to 77.9 percent while passenger revenue yield per passenger mile decreased by 4.8 percent to 11.07 cents. This resulted in a decrease in passenger revenue per available seat mile (RASM) of 2.5 percent to 8.62 cents. Following is additional information regarding American's domestic and international RASM and capacity:

Three Months Ended September 30, 2004
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
Domestic 8.29 (4.6)% 29.6 (1.3)%
International 9.28 0.9 14.9 14.5
Latin America 8.63 (7.0) 7.2 16.8
Europe 10.06 9.6 6.3 8.7
Pacific 9.13 4.7 1.4 32.7




Regional affiliates' passenger revenues, which are based on industry standard mileage proration agreements for flights connecting to American flights, increased $89 million, or 22.3 percent, to $488 million as a result of increased capacity and load factors. Regional affiliates' traffic increased 33.9 percent to 2.0 billion revenue passenger miles (RPMs), while capacity increased 29.7 percent to 2.8 billion ASMs, resulting in a 2.2 point increase in passenger load factor to 69.0 percent.
-snip-

and,
(*)Excludes $539 million and $441 million of expense incurred related to Regional Affiliates in 2004 and 2003, respectively.


Revenue of 488 mil, and expense of 539 mil. Of course this includes TSA, and CHQ, right? They're making money because AA pays a rate above their cost, yet they generate less revenue for AA than they cost AA. Correct? :huh:

 

[flyboymd8]

Actually AMR pays Eagle on a fee per departure basis. The school of thought on selling Eagle is this, get some money and then contract out the current flying Eagle is doing to the lowest bidder, i.e. lower payments of fees for departure. Which will increase AMR's bottom line. By selling EAgle AMR doesn't have to prop it up and reduces it's own costs. i.e. facilities, Sabre fees, aircraft costs, employee costs, etc.

Md83g

 

[Winglet]

The reason commuters are making a profit is because the mainlines guarantee them a profit with the fee for departure scheme. It doesn't matter if they fly a very expensive CASM RJ empty . . . . it still "makes" money. Arpey may be thinking of dumping AE while it's still worth something and before the RJ market collapses. If the RJ outfits have to start doing business without the FDP drug, they're going to go into withdrawl real quick.

 

[WingNaPrayer]

Of course, there is always the fact that AMR has hocked the farm, so a good chunk of their revenue is going towards the massive debt load that has been created. Creditors don't let you sit idle with that type of debt load, you have to keep up with the payments or notes get called. In the simplest of terms, AMR may be sitting on money in the bank, but because of how they got it, it's buying power isn't what it should be.

It's going to be a very interesting Annual Report for fiscal 04.

 

[Skyhungry]

Worldtraverel,

Take a closer look at the AMR 10K. Winglet, Flyboymd8, and Aaviator are correct. According to AMR’s 10K in 2003 American paid $250 million more to its regional airlines under capacity purchase arrangements than it received in revenues from those carriers. Eagle is only profitable because AMR makes them profitable at AA's expense. If I were Arpey I would also be trying to dress up the pig nice and pretty and see if it receives any interest. I think its time to sell Eagle. B)

 

[imlars]

Worldtraverel,

Take a closer look at the AMR 10K. Winglet, Flyboymd8, and Aaviator are correct. According to AMR’s 10K in 2003 American paid $250 million more to its regional airlines under capacity purchase arrangements than it received in revenues from those carriers. Eagle is only profitable because AMR makes them profitable at AA's expense. If I were Arpey I would also be trying to dress up the pig nice and pretty and see if it receives any interest. I think its time to sell Eagle. B)

[post="197769"][/post]​

Eagle has been fee for depature for ONE year. The accounting move was made to prepare for a spin. The difference was about 4 milion to the bottom line for the first full year. AA does not prop up Eagle. Looking for proof in a SEC filing is equal to guessing which shell covers the pearl.

Lars

 

[will fix for food]

http://www.bts.gov/press_releases/2004/bts.../bts025_04.html


According to an internal Eagle financial release this is the first quarter that Eagle did not make it's margin of 8%. It came in at, I believe, 6.8%. Overall for the YTD however Eagle has made considerably more than the 8% margin and has made American more than it has cost American under the FPD terms.

There are a few things to note here. First, while Eagle did not cover its margin in the third quarter its operating revenues still exceeded its operating expenses and would have made money even if it wasn't FPD. Second, the "regional affiliate" expenses include Chautauqua, Corporate, and Tran States whose numbers are not broken out individually. However, if you compare the DOT reports for American and Eagle and do a little extrapolation you can see that Eagle is not the carrier causing Americans FPD expenses to exceed the revenues. Third, Eagle is intertwined so tightly with American that the disruption in service caused by a changeover to a new carrier would far outweigh the benefits of a total divestiture and might throw American into bankruptcy. In one of Carty's old speeches he mentioned that the revenues derived from Eagle feed were the difference between profit and loss even in the good times. Considering the times we are in now, it probably isn't wise to interrupt that flow even a little bit.

It seems the wisest way for AMR/American to go would be a 49% spin off. Make some money off Eagle but keep the operation going the way it is.

 

[FWAAA]

Arpey pointed out at yesterday's investor and analyst conference that although an IPO of Eagle could happen, nothing is guaranteed.

He also reminded everyone that it seems odd that so many commuter or regional carriers are reporting profits when all the legacy carriers are losing money.

Given that, it seems like owning Eagle is probably the best course of action, at least until the commuter airlines assume more of the downside.

Nobody really knows whether Eagle is profitable. But everyone does know that IF IT IS, AMR gets to keep those profits in the family. At the other airlines that don't own their regionals, those profits are gone from the legacy carriers.

 

[flyboymd8]

AMR gets to keep the profits regardless. On a fee per departure basis, AMR pays the regional operator a fee, and in return keeps all the profits generated from that departure. If AMR were to farmout that flying to the lowest bidder, then not only would the fee they pay be lower, they would also not have the associated costs of operating Eagle as a company, i.e. no employee costs, sabre costs, RJ financing costs etc. From a company stand point it makes a lot of sense to sell Eagle, use the money to increase international flying where money can still be made and farmout the flying to the lowest bidder. Let me also be the devils advocate and suggest that EAgle can be made to look as profitable as AMR wants it to be if it serves their needs, i.e. setting Eagle up for sale, so the truth is in reality no one really knows if Eagle is profitable or not. As for disruption in service, it's not like AA would all of a sudden discontinue Eagle feed over night, it would happen over a period of time where other regionals would take over Eagle routes.

 

[flyhigh]

flyboymd8-

If AMR sold eagle off they would still pay all the costs you're referring to. Eagle would pass the employee costs off to AA, as well as all the other costs. The fee per departure pays for that stuff. While one could argue that AA could then negotiate lower fees, it is unlikely since Eagle is the only game in town that has sufficient capacity to meet AA's needs, thus Eagle could use a hard stance.

As for making it appear profitable to make a more attractive sale...that is a sure way to have the SEC knocking at one's door. While you can do certain things to provide a prettier picture, they are limited in scope and size and thus don't add sufficient amounts to the bottom line. Most likely, they buyers know the tricks too and would discover them during the due diligence phase...

 

[flyboymd8]

Actually they would not b/c Eagle would no longer be under the AMR scope. Eagle would be a totally different company with it's own debt and operating costs. As for lift Eagle would have no leverage as they would be forced to accept the lower fee and then in turn lower their own costs through employees. Look around the industry there isn't a single regional out there with the power to demand that it's mainline operator do as they want done. As for making Eagle look profitable, I'm not talking about doing anything illegal. There are ways to making Eagle look profitable with current accounting practices. Airlines have used weighted revenue and costs for decades and they can make a particular area look healtheir than it actually is, and all within legal and current accounting practices. BTW why do you think US Air and United both have given up a good portion of their flying to regional operators that are not wholly owned. There is a distinct advantage to farming out the work to the lowest bidder and reducing your own costs. Look what United has done with Skywest and Mesa. In either case it's really time for AMR to decide what they need to do, they cannot continue to sell their product below cost and survive long term in their current form.

 

[flyhigh]

...good examples, but apples and oranges. In order to IPO the company you have to make it attractive to the buyer. The best way to do that is show that it will be a long term player. Why do you think ExpressJet is STILL the primary (about 99%) provider for CO? In order to IPO the company they had to show that it would continue to feed CO (at a healthy margin) for the long term.