CHICAGO (Reuters) - American Airlines parent AMR Corp <AMR.N> plans to shed regional carrier American Eagle, the world's largest airline said on Wednesday, a move analysts say could generate cost savings and boost its share price.
By Kyle Peterson
CHICAGO (Reuters) - American Airlines parent AMR Corp <AMR.N> plans to shed regional carrier American Eagle, the world's largest airline said on Wednesday, a move analysts say could generate cost savings and boost its share price.
High oil prices and a slowing economy threaten an industry recovery, and these uncertain market conditions coupled with falling shares have led some investors to call for AMR to boost its value. Responding to the announcement, AMR shares rose 6.9 percent to $21.98 on the New York Stock Exchange on Wednesday.
"The decision comes after a careful and deliberate evaluation of the strategy that will best enable us to continue to create value for our shareholders," AMR Chairman and Chief Executive Officer Gerard Arpey said in a statement.
!ADVERTISEMENT!The company said it is evaluating the form of divestiture, which could involve a spin-off to AMR shareholders, a sale to a third party, or some other form of separation from AMR.
Chief Financial Officer Tom Horton told Reuters the move would open up growth opportunities for American Eagle that are impossible now and sharpen AMR's focus on its core operations.
"It really just means that we'll be zeroing in on our mainline business," Horton said.
American Eagle operates about 300 aircraft, with 1,700 daily flights to more than 150 cities throughout the United States, Canada, the Bahamas, the Caribbean and Mexico. In 2007, American Eagle expects to generate revenue of $2.3 billion.
The planned divestiture would include both American Eagle, which feeds American hubs in North America, and its affiliate, Executive Airlines, which flies to destinations in the Bahamas and Caribbean from Miami and San Juan, Puerto Rico.
COULD BE A DIFFICULT SALE
One expert said a sale of American Eagle at this point could be difficult for AMR. "I think it's a tough market in which to sell it because of the overhang of 50-seat aircraft," said airlines consultant Robert Mann.
"Whoever buys it is going to want an ironclad buy/sell arrangement with American, and American may want exclusivity, so there's a whole series of issues that have to get ironed out," Mann said.
Once the two airlines are separated, American Eagle would continue to provide American with regional flying, AMR said.
AMR has been under pressure to consider spin-offs as a way to boost its share price, which is down 27 percent this year. In September, FL Group, an Icelandic private equity group that owns 9.1 percent of AMR, called on the company to consider spinning off its frequent-flyer program.
"We welcome any initiative that looks to enhance shareholder value," an FL Group spokesman said on Wednesday.
In past sales of regional carriers, the parent airlines have derived some cost savings for mainline operations, said Morningstar analyst Brian Nelson.
"You're monetizing an asset in the face of an uncertain domestic market as well as very high jet fuel prices, so doing this could also help raise some cash in a time of need," he said.
Other airlines also are considering divestitures. UAL Corp <UAUA.O>, parent of United Airlines, has said it might spin off part of its frequent-flyer program. Delta Air Lines Inc <DAL.N> has said it is considering the sale of regional unit Comair.
(Additional reporting by Chris Reiter in New York; Editing by Gerald E. McCormick and Braden Reddall)
