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Does Pilot Contract Rejection Mean the End of American Eagle is Near?

Feb 14, 2014 3:06 pm

Skift Take

Is it posturing and negotiating tactics or will American Airlines really bring in other regional airlines after American Eagle pilots rejected a contract offer? American Airlines has been trying to figure out what to do with American Eagle for the past seven years, and it looks like decision time finally is looming.

— Dennis Schaal

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Steve Smedley  / AP Photo/The Pantagraph

In this March 9, 2010 file photo, an American Eagle flight waits for release from the air traffic control tower at Central Illinois Regional Airport in Bloomington, Ill. Steve Smedley / AP Photo/The Pantagraph


American Eagle, the regional subsidiary of Fort Worth-based American Airlines Group, may get smaller after a pilots union rejected a proposed 10-year contract agreement.

American will look for other regional carriers to fly its new aircraft on short-haul flights after the leaders of Eagle’s pilots union decided late Wednesday not to send a proposed contract to members for a vote, a top executive said Thursday.

In a letter sent to all 14,000 Eagle employees, the regional carrier’s president, Pedro Fabregas, said American has “no choice but to begin looking for another regional carrier.”

“I have no reason to believe American will offer us new large regional jet flying after these unsuccessful negotiations,” Fabregas wrote.

Tensions are running high between American Eagle’s management and the Air Line Pilots Association.

The union said American has threatened to shrink and eventually liquidate Eagle, which is being renamed Envoy this spring as American expands its use of outside carriers to fly routes under the Eagle brand. As a result, the union said, it will help its pilots find other careers at a time when the industry has a shortage of qualified pilots.

Industry analysts say it’s hard to separate rhetoric from reality for the regional carrier as labor talks appear to be at a standstill.

Management “is trying to extract concessions from a group that is clearly high-priced relative to others in the regional space. But at the same time, it’s a sector of the industry that is suffering from the problem of finding sufficient people to do the work,” said Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology.

Given concerns about a shortage of regional airline pilots, he said, the union is “playing poker with face cards in their hands.”

The tentative agreement rejected by union leaders would have guaranteed that 60 new Embraer 175 aircraft that American Airlines Group ordered in December would be used with Eagle. In exchange, pilot pay scales would have been frozen until 2018 and profit-sharing would have been eliminated.

“Our elected representatives agreed that this new round of concessions was asking too much of a pilot group that has already given up previously agreed-to contractual work rules and benefits in order to ensure American Eagle’s solvency,” union leader William Sprague said. “We can no longer stand by and watch our wages continue to be eroded when profits continue to be made.”

A pilot shortage

In January, the federal government implemented enhanced flight time duty rules and commercial pilot requirements, and more pilots are reaching the mandatory retirement age of 65. That leaves the industry facing a pilot shortage, a problem that analysts expect to get worse in the coming years.

Last week, regional operator Republic Airways said it was grounding 27 jets because it didn’t have enough pilots to operate them. ExpressJet told United Airlines in January that it needed to cut flying on behalf of the Chicago carrier, and United recently decided to de-hub its operations at Cleveland, where ExpressJet handles much of United’s regional flying.

New government rules require commercial pilots to have at least 1,500 hours of flight time, as opposed to the old requirement of 250.

“We continue to believe the regional airlines will struggle to find pilots due to the new pilot rules,” Cowen and Co. analyst Helane Becker told investors in a research note last week. “As a result of the limited pilot availability we expect to see reduced flying by the regional carriers and pilot wages increase.”

And fewer people are entering the profession, compounding the shortage. Training to become a pilot costs around $90,000, said aviation consultant Robert Mann, and the typical first officer at a regional carrier makes only around $22,000.

“When you’re starting off as a pilot, you don’t make enough money to get off food stamps, and that doesn’t give people a very great incentive to undertake pilot training,” Mann said.

At American Eagle, a new hire makes $26 an hour. Based on a guarantee of 72 hours a month, the first officer would make about $22,464. Eagle is offering $5,000 signing bonuses to new pilots who agree to stay with the carrier for two years. Captains, however, can earn significantly more, with pay rates of $67 to $104 an hour.

With several mainline carriers, including American, also hiring pilots, analysts say, the Eagle pilots have job opportunities even if American shrinks its regional flying. The newly merged American has 10 carriers that provide regional service for American Airlines and US Airways.

“I don’t think there are going to be that many unemployed pilots along the way, but networks are going to get smaller before they ever think about getting bigger,” Swelbar said.

Does American need Eagle?

The question of what to do with American Eagle has puzzled American executives for years. In 2007, AMR Corp. announced that it planned to sell or divest American Eagle. But when the recession hit a year later, the company took Eagle off the market.

With its hub network, analysts say, American needs the passengers whom Eagle feeds into its hubs to fill up the larger planes it’s buying for transcontinental and international flights. Analysts also question how fast American can reach a deal with other regional carriers that are also dealing with pilot shortages.

“I don’t know how seriously intended this is, nor do I know how seriously American has considered how quickly it could re-create the lift it needs for their hubs,” Mann said.

But aviation consultant Mike Boyd disagrees that American would be hurt if Eagle is downsized.

“It’s an entity that has declining value in the marketplace, and with the pilot shortage, they should have shut it down in bankruptcy,” Boyd said.

In an analysis of Dallas/Fort Worth Airport, Boyd said Eagle brings in about 4 percent of the passengers. If Eagle were liquidated, the passenger traffic would likely be picked up from other markets, since American is running relatively full flights at its largest hub.

“The feed you’re getting from San Angelo, if it went away, it’s not going to kill the airline,” Boyd said.

During labor negotiations, it’s difficult to know whether threats by the company or the union are going to come true.

Mike Davis, economics and finance professor at Southern Methodist University, said bluffing sometimes backfires. In 2012, when Hostess Brands told its union workers to agree to concessions or face a shutdown of its Twinkie factories, the bankrupt baker followed through with the threat, and thousands lost their jobs.

Davis said he isn’t sure that an Eagle liquidation is a credible threat.

“It really makes sense for these guys to get it done,” Davis said. “American needs the pilots and they need the regional jet service, and most of the pilots, all things considered, would just as soon stay if they could get a decent raise.”

Andrea Ahles, 817-390-7631 Twitter: @Sky_Talk ___

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