"By Annette Santiago/Aviation Daily http://www.aviationweek.com/aw/gener.../AMEA12037.xml

The big winner in the American-American Eagle divestment (DAILY, Nov. 29) would be the major carrier's stockholders, analysts say, as Eagle would face a regional market with little to no room for growth.

The divestment "isn't being driven by American. This is being driven by hedge funds trying to extract unlocked value," Velocity Group partner Doug Abbey told The DAILY. "They think American is sitting on assets that if spun off would provide great shareholder value. These companies that own shares in airlines see their stock languishing, and they're trying to enhance shareholder value."

Aviation analyst Darryl Jenkins noted that American would likely use proceeds from a third-party sale or spinoff to pay down its outstanding debt, a move that shareholders would definitely cheer. "Dependent on how the market is, you might get some sort of a price premium," Jenkins noted. Wall Street is putting Eagle's price in the ballpark of $800 million to $1.2 billion, Abbey said, but "regional IPOs are difficult. Analysts say there is value to the selloff, but to replicate that service would cost a considerable sum as well."

American is more likely to spin off Eagle to AMR shareholders, rather than sell it to a third party, JP Morgan analyst Jamie Baker believes. If a third-party sale were to occur, Baker said he is "hard-pressed to envision sale proceeds any higher than $800 million." He noted that Eagle's labor costs are "believed to be among the regional industry's highest."

The effect of the divestment on the regional market is uncertain, too. On the one hand, "it makes Eagle a potential franchisee to bid for contract flying," Abbey said. "One assumes American would be seeking competitive bids in the hopes that someone would underbid Eagle."

But Abbey sees little to no opportunity for growth in the sector because of scope, therefore "the timing [of the move] could not be worse." American, too, seemed to sense this, and has indicated that the divestment might not happen "if [market] conditions are not right."

Still to be seen is the message that the spinoff sends to American's mainline pilots. "American has the most onerous scope," Abbey said. "If American management perceives this to be an olive branch to mainline, this could change the tone of [future] pilot-management talks."




Would like to hear opinions on the matter.