One more turn of the screw at AMR

 - May 9, 2008, 5:29 AM

AMR’s long-anticipated plan to shed its San Juan, Puerto Rico-based Executive Airlines division appeared all but secured after American Eagle signed a letter of intent last month to sell the airline to Puerto Rican hotelier and founder of Executive Air Charter Joaquin Bolivar. As expected, the move drew sharp criticism from both the Air Line Pilots Association and the Allied Pilots Association, the unions representing American Eagle and American Airlines pilots, respectively.

Calling the plan an example of contractual “sharp shooting,” APA president John Darrah reiterated the union’s pursuit of a grievance to bar American Airlines from signing agreements designed to skirt limits on capacity growth at the airline’s regional affiliates. ALPA, meanwhile, awaits word on a date for an arbitration hearing of its own related to charges of similar scope-clause violations.

The issue in question centers on American’s attempts to open room at American Eagle for delivery of 70-seat Bombardier CRJ700 regional jets and increase ASMs among its Embraer fleet. APA continues to hold firm on its contractual right to halt ASM and block- hour growth at the regional affiliates while 883 mainline pilots await recall from furlough, prompting American to pursue “creative” strategies for optimizing profitability within a division constrained by scope provisions.

Code Shuffling Buys Time

Early this year American responded to the limits at its regional affiliates first by removing seats from Eagle’s Saab 340 and ATR turboprops, then by stripping the AA* designator code from St. Louis-based flights operated by American Connection partners Chautauqua, Trans States and Corporate Airlines. The move to strip the AA* code from the Connection flights gave American another six months to find a suitable buyer for Executive after talks broke down with St. John’s, Antigua-based Caribbean Star in March.

American’s decision in August to retire 74 more Fokker 100s and nine Boeing 767-300s corresponded with a plan to furlough as many as 550 more pilots, a move that no doubt further raised the ire of APA in light of the expansion of the Connection fleets. Although American has yet to retire any of those airplanes, it has canceled their scheduled C-checks and furloughed some 80 more pilots at the beginning of last month.

Of course, the removal of the AA* code from the Connection flights drew immediate cries of foul from both APA and ALPA. But not until mid-July, when American Eagle announced it would sell 14 Embraer ERJ-145 regional jets to American Connection Partner Trans States Airlines, did the tenor of the so-called outsourcing issue reach a such a fever pitch with regional pilots.

Declaration of War

“Our contract requires that if American Eagle transfers all or part of the airline’s operation, our pilot and contract will be transferred with the aircraft,” said Eagle ALPA chairman Herb Mark. “Unless American Eagle management plans to comply with these provisions, their announcement amounts to a declaration of war.” At press time American Eagle had transferred three of the 14 ERJ-145s to Trans States.

American expects to conclude the agreement to sell Executive to Bolivar by the end of next year’s first quarter. According to a company statement, Gary Ellmer will remain president of Executive after the sale. Ellmer joined American Eagle in 1999 as regional vice president of its Northeast region after Eagle bought Business Express Airlines, where he served as president and COO.

The transaction features a marketing partnership under which Executive will continue to provide feed traffic to American in San Juan and Miami under its own designator code–an arrangement similar to that employed with Chautauqua and Trans States in St. Louis. As in the case of the St. Louis affiliates, Executive will fly under the American Connection livery, a major bone of contention with pilots of both American and American Eagle. “In APA’s view, the freeze on commuter feed now in effect applies to both owned and non-owned commuters that provide feed, regardless of which code the commuter carries,” said APA’s Darrah.

Meanwhile, under the terms of the successorship provision in the American Eagle contract, senior Executive Airlines pilots reserve the right to displace more junior Eagle pilots at other stations, potentially setting in motion a so-called “system flush,” in which each transfer from Executive could result in a cascade of job displacements. For example, if an Executive pilot bumps an Eagle pilot based in Dallas, the Eagle pilot could bump a more junior pilot at another station, and so on, potentially requiring as many as three training events for every one transfer out of Executive.

The fact that most of Eagle’s most junior pilots fly for Executive may mitigate the cost effect of such a scenario, however. Still, ALPA leaders question the wisdom of selling Eagle’s most profitable domicile while the mainline hemorrhages hundreds of millions of dollars per quarter. “Apparently AMR’s plan is to sell off, downsize and outsource the most profitable portion of its operations, American Eagle, to sustain its least profitable subsidiary, American Airlines,” said Mark. “This same type of strategy has had devastating consequences in the past for other airlines, including Braniff and Pan Am. Will this strategy work at American Eagle? I don’t think so. If that’s AMR’s plan for recovery, we are going down a very rocky road.”

Flying 41 ATR 72s and 29 ATR 42s, Executive employs 450 pilots and carried roughly 12 percent of American Eagle’s passenger traffic in October. Analysts estimate the sale could fetch as much as $700 million for AMR, which recently indicated an interest in selling all its “noncore assets,” including American Eagle.

“Although I am disappointed that we have had to take this step, this transaction achieves a number of objectives,” said American Eagle president Peter Bowler. “First, it keeps American in compliance with the scope clause imposed in the contract between American and APA. Second, it preserves jobs at both Executive and Eagle by avoiding the necessity of grounding additional aircraft, which would have been the alternative to the sale. And finally, the sale will provide American with valuable and profitable feed traffic.”

Bolivar established Executive Air Charter in 1979. Six years later the company began scheduled air service in the Caribbean, flying routes formerly served by the bankrupt regional airline Prinnair. In September 1986 Executive negotiated an American Eagle franchise agreement, and began coordinating its flights with American Airlines flights into and out of San Juan. In December 1989 AMR Eagle bought Executive Airlines. This past summer American Eagle transferred the Miami domicile onto the Executive certificate. Today, Executive still flies under its own license, despite American’s stated plans to consolidate the operation onto Eagle’s certificate after it merged Simmons, Wings West and Flagship in 1999.