With regional airlines making most of the industry’s money these days, one would think any old-line carrier struggling to turn a profit would be thrilled to have one under its wing.
But Continental Airlines last year sold most of its regional carrier, ExpressJet, and put some of the proceeds toward its pension plans. Northwest Airlines spun off Pinnacle Airlines last fall.
United Airlines already contracts out all of its regional airline work.
But the world’s largest carrier, American Airlines, has held tight to American Eagle Airlines, one of its fastest-growing and most profitable operations.
The world’s largest regional airline, Eagle is expected to carry 17 million passengers in the United States, Canada, the Bahamas and the Caribbean in 2004, up about 20 percent from 2001.
It is O’Hare International Airport’s fourth-largest airline, behind United, American’s mainline operation and United’s combined regional contract partners.
Still, executives of Ft. Worth-based American do not dismiss the possibility that they might spin off Eagle.
A lot depends on how well the parent company fares in the coming months, and whether it needs the fast cash that Eagle could generate.
“American and its employees have done an incredibly good job of becoming more efficient and competitive,” said Peter Bowler, president of American Eagle since 1998.
“But this is still a very difficult business. … I don’t think anybody’s closing any doors in terms of different initiatives.”
Since coming back from the brink of bankruptcy through a series of labor and other cost cuts last year, American has been hailed for its more efficient operations.
And no one is calling for the airline to sell Eagle, which flies more than 275 aircraft, including about 195 regional jets. The rest are turboprops.
But if American decides it needs more money, if competition tightens for regional carriers in general, or if its labor costs climb too high, Eagle could be cut loose.
Equity analysts and investors tried to pressure mainline airlines into selling their regional carriers in the late 1990s “so the regional airline’s share value wouldn’t be weighed down by being part of the total airline,” said Philip Baggaley, a managing director in ratings services at Standard & Poor’s.
At that time, the airlines did not listen. But the turbulence of recent years has prompted some to sell their more profitable regional siblings.
The regional carriers have fared particularly well in recent years, partly as air travel was slowed by the recession and fear of terrorist attacks after Sept. 11.
Although regional jets are more costly to fly per passenger, particularly with high fuel prices, an airline makes more money ferrying 50 passengers the same distance aboard a small jet than a large one.
For that reason, the major airlines have turned more routes over to regional carriers, whether they own them or simply have contracts with them.
Regionals up in first quarter
In the first quarter of 2004, the nation’s seven largest regional airlines turned a profit of $201.7 million, compared with $57.7 million for the seven largest low-cost carriers.
The seven biggest mainline carriers lost a staggering $1.31 billion, according to the Bureau for Transportation Statistics.
Flights aboard regional jets also have become longer, as mainline carriers give up routes with fewer passengers. Out of O’Hare, Eagle operates several flights that last longer than two hours to such destinations as Oklahoma City, Atlanta and Hartford, Conn.
The average length of an American Eagle flight has grown to 348 miles from 262 miles in 2001.
Bowler considers the average trip, which lasts just over an hour, to be “fairly modest.”
“Our customer satisfaction scores are close to those of our mainline competition if you take away first-class,” he said.
The heyday for regional carriers could come to an abrupt halt if low-cost carriers begin to compete in those markets, as many experts predict.
The full-service, low-cost airline JetBlue has ordered 100 regional jets to compete in smaller markets.
“The major markets are all just about as full as they can get right now with competition,” said Ron Kuhlmann, vice president of Unisys R2A Transportation Management Consultants in Oakland.
“The next logical place is second-tier markets, and, clearly, that’s the strategy JetBlue has in mind with smaller jets.”
Labor costs also could become a bigger issue for regional carriers. That issue looms particularly large at mainline companies that own their regional carriers, Kuhlmann said.
“As soon as you have that in-house, you have a different target to which people are aspiring,” he said, citing a Comair strike in 2001 in which its pilots compared themselves not with other independent regional pilots but with the pilots at Comair parent Delta Air Lines.
“You have the potential of people seeing themselves as second-class citizens,” Kuhlmann said.
Ongoing labor issues
American Eagle has been in negotiations with its flight attendants union since mid-2002. The issue is not wage cuts as it was with American’s mainline flight attendants and other workers last year. Rather, the question is how much of a raise they should receive.
Pat Friend, president of the Association of Flight Attendants, said negotiating with American Eagle management has been difficult because “they don’t have any respect for the flight attendants, and they’re continually looking for reasons not to get along.”
After six years on the job, American Eagle flight attendants make up to $18,000 annually, making them the 40th highest paid out of 42 U.S. airlines ranked by the Association of Flight Attendants. Flight attendants on American Airlines rank 10th, making about $28,000.
Flight attendants at Delta’s Comair, the top-ranked regional airline, make about $26,000 after six years, Friend said.
“Our flight attendants should have a raise,” Bowler said. But he noted that Eagle workers did not take pay cuts last year along with mainline American employees, “despite the fact that we, too, were losing money and facing a very challenging environment.”
Bowler declined to discuss specifics of Eagle’s profitability, but said he expects the regional carrier to contribute favorably to American’s earnings in 2004.
