By the time American Eagle president Dan Garton spoke with AIN in late March, he had just presented his labor groups with a restructuring plan that called for a 5-percent reduction in the number of employees to achieve the cost savings the company would need to emerge from Chapter 11 bankruptcy. The timing of the interview would indeed prove impeccable, as Garton could finally address some of the questions on the minds of so many since AMR, American Airlines and American Eagle all declared insolvency last November 29.
But as this year’s chairman of the Regional Airline Association, Garton finds himself responsible not only for answering to the various constituencies at Eagle, but also for representing the interest of the 30 or so airline members of the RAA. To his credit, he didn’t shrink from voicing the depth of the “challenges” faced by his compatriots as well, particularly as they relate to some of the most drastic regulatory changes the industry has seen at one time in its history and the slower than expected execution of consolidation “synergies” at other regional airlines.
“In the U.S. regional industry, the financial results have deteriorated over time,” said Garton, particularly over the last three or four years. “The mainline airlines have in the past experienced their own challenges. And in some ways the regional airlines have been impacted by that.”
Garton, of course, was referring to the major airline partners’ largely successful efforts to negotiate new fee-per-departure contracts that squeezed regional airline margins to virtually unsustainable levels. Along with the generally weak economic recovery, the industry has suffered from its failure to consolidate effectively.
“Some of it has been caused by a trend of consolidation, which will be positive, but in the short run I think the costs of some of that, of the integration on those, have been higher than expected,” he said. “I think the time to benefit from the synergies has been longer than initially expected by some.”
Rule Changes, Pilot Shortage Looming
Garton, however, expressed confidence that the industry’s historic ability to adapt to change will again come into play, as it must to deal with a looming pilot shortage and to emerge from two fairly drastic rule changes scheduled to take effect over the next two years. “We’re going to come upon a time where the availability of pilots becomes an issue,” said Garton. “Part of that is driven by the natural demand for pilots caused by attrition, largely at the mainline carriers but at the regionals as well, [but also by] the federal regulations about duty time and rest requirements. And at the same time the supply of pilots will be impacted by rules defining the minimum number of hours they must have to qualify to be an airline pilot.”
Individually, said Garton, these factors pose difficulties to which the industry could adapt fairly quickly and effectively. However, he said he fears the confluence of events could prove devastating, at least in the short term.
First came the so-called flight and duty time rule, which will require pilots to rest at least 10 hours before each flight duty period–a two-hour increase over existing rules. It also places new limits on the number of hours a pilot can fly weekly and monthly and extends to 30 from 24 the number of consecutive hours off a pilot must have in a seven-day period.
Second, and perhaps even more devastating to the regionals, came the NPRM that calls for a requirement that first officers hold an air transport pilot (ATP) certificate and its associated 1,500 hours of flight time, except under limited circumstances.
“Either one of these rules…would have been an issue, but I don’t think everybody has fully recognized the impact of the convergence of those two rules and the impact it will have specifically on the regional airlines.”
As the majors draw more pilots from the ranks of the regionals, particularly as the effect of the Age 65 retirement rule runs its course, and the pool of talent from which the regionals typically recruit continues to drain, pilot classes will thin and small communities will ultimately lose service, asserted Garton.
Although Garton acknowledged the industry has seen the number of new pilot recruits shrink over the past 10 years, American Eagle managed to hire more than 600 pilots last year. “It’s still an attractive career,” said Garton. “Has it changed over the past decade? Unquestionably it has changed. It’s changing right now…There are fewer people getting pilot certificates than there were a decade ago. But Eagle was still able to hire plenty of people last year. It’s just the convergence of these two rules at the end of 2013 that causes at least me to be concerned…But there is no question that a certain percentage of our pilot hires last year would not have qualified under the guidelines that are going to come into effect at the end of next year.”
Garton cited estimates that the flight and duty time rule alone will create a demand for between 5 and 10 percent more pilots in the U.S. If U.S. airlines employ some 80,000 pilots, even just a 5-percent growth in demand will equate to a need for 4,000 more, at a time when the criteria for hiring change. “We’ll get through it, but it would seem to me in the short run some smaller communities should prepare themselves for a reduction in service,” warned Garton.
Service Interruptions Possible
Separate from the issue of a pilot shortage, some of the communities into which Eagle now flies might need to prepare for at least short-term cuts in service, depending on the fallout of AMR’s plans for removing all of the regional airline’s ATR 72 turboprops in Dallas, Miami and Puerto Rico. After announcing on February 24 that it would return another nine Miami-based turboprops to their lessors this month, news surfaced in late March that Eagle would completely close its operation in San Juan, P.R., by next March, spelling the return of the final nine ATRs.
The moves account for part of a plan to shed $75 million a year in labor costs, or about 13 percent of the companies’ total costs. The plans called for the removal of 500 and 600 positions companywide, out of some 13,000. Eagle will also look for concessions related to benefits and pay structure from its employees, said Garton, as well as certain allowances from lessors and vendors.
“The biggest issue for Eagle is the discussions with Embraer,” said Garton, referring to negotiations for concessions with its lessors and vendors. “We have an interim agreement that gets us a few more months to work through the possible changes to the financing arrangements on those aircraft.” Garton called American Airlines “very much a central figure” in the negotiations because AA actually leases the airplanes. “So that is multi-party negotiation, with the financing party [Brazilian state bank BNDES], with the manufacturers involved, [such as] Rolls-Royce on the engines and Embraer on the airframes, American Airlines, Eagle…and I am hopeful we’ll find a solution that works for everybody.”
Although in the short-term it appears Eagle will shrink, in a letter to Eagle and Executive Airlines employees, Garton said American envisions 20 percent more flying at its five “key” domestic markets, boosting the need for regional feed over time. However, American’s plans call for “diversifying” feed among several regional carriers, leaving Eagle in a position to bid for the business. “So it is absolutely imperative that Eagle reduce its costs in order to compete aggressively and return as much of American’s regional business as possible,” wrote Garton.
“The good news is that our labor unions and we work very closely together, and have for a long time,” Garton reminded AIN. “So, nobody was thrilled [about] the discussions…but we have a solid working relationship and we’ve tried to keep them well informed at all times about our cost issues. Again, nobody was thrilled, but nobody was shocked by what we were saying.”
American has made no secret of its desire to add larger-gauge regional jets to its fleet to compete more effectively against the likes of Delta Air Lines, United Airlines and US Airways, which operate under far more liberal scope-clause restrictions than does AA. At this point American’s pilot contract limits the capacity of Eagle RJs to 70 seats and the number of its Bombardier CRJ700s to 47 airplanes, while a more complicated pair of clauses governs the size of its fleet of 21 Embraer ERJ-135s, 59 ERJ-140s and 118 ERJ-145s. The new scope clause proposed by American would allow American Eagle and other regional affiliates to fly either jets or turboprops with a passenger capacity of 88 seats and an mtow as high as 114,500 pounds. Perhaps more significantly, the new clause would allow regional affiliates to fly as many as 255 jets with a passenger capacity of between 51 and 88 seats–or up to 50 percent of the total number of mainline aircraft. The maximum number of jets holding 50 seats or less allowed during any six-month period would equate to the number of narrowbodies at American Airlines multiplied by 110 percent.
Fifty-seaters not dead yet
Garton agreed that the mix of 50-seat jets and larger regional jets “isn’t optimum,” but he would not sound the death knell–as have many industry analysts–for 50-seaters in Eagle’s fleet or the U.S. regional fleet in general. “Saying that there is no place for a 50-seat jet in the U.S. network to me is weird,” said Garton. “There are many markets where 50-seaters are just the right size to fly in that market…fuel prices work against that small an aircraft, so it depends a little bit on the revenue characteristics of that market. But as I look at the results, there are an awful lot of markets–smaller markets obviously–where the smaller jet has a better economic result. Too much has been said that there will be a demise in that aircraft size.”
Notwithstanding American’s removal of its ATRs, Garton would not discount the possibility of Eagle’s operating turboprops in the future, whether for American or another major airline. Of course, any venture outside the American network would require a divestiture of Eagle from AMR, negotiations over which the airline and employee groups reached an advanced stage before the Chapter 11 filing.
“Last year we were full steam on a divestiture path where Eagle would become independent,” said Garton. “During that process, while we were doing the legal work to cause that to happen, we had several conversations with mainline carriers. But the divestiture is currently on hold due to the restructuring, and therefore those conversations with other mainline carriers are essentially on hold. But, at some point in the future, as we emerge from bankruptcy, I would think that the interest that American, AMR and Eagle had in the divestiture will come up again, because I don’t know why our interests would be different at the end of this year from the end of last year, when we concluded that it was in the interest of the shareholders, employees, et cetera to do it.”