Regional Carrier Spinoffs on Hold

For now, Delta and American don't appear to be rushing to shed their divisions.
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CHARLOTTE, N.C. -- Anybody want to buy a regional airline?

At least two are for sale, and the timing, from a buyer's point of view, could not be better. Many airline shares are trading below the levels they reached immediately following the Sept. 11 terrorist attacks, and airline assets are concurrently undervalued.

From a seller's perspective, American parent

AMR

(AMR)

and

Delta

(DAL) - Get Report

do not appear to be in any hurry to part with their regionals, although they have announced their intentions to do so.

"Selling anything in this market, no matter what the industry, means you're giving things away," says FTN Midwest Securities analyst Mike Derchin. "Valuations are ridiculously low, and there aren't many buyers."

AMR, one of the two legacy carriers not to file bankruptcy after the attacks, lost more than 50% of its value in September 2001, hitting a low that month of $15.90 a share. Shares subsequently dipped as low as $1.25 early in 2003. AMR shares traded Thursday at $11.40.

American announced in November that it wants to divest regional carrier American Eagle, which has annual revenue of $2.3 billion and operates around 300 aircraft. The announcement came after Iceland-based FL Group, the then-owner of 9.1% of American's shares, urged a spinoff of the carrier's frequent flier program.

AMR shares surged 8% on the day of the announcement, then gave up all the gains in the following session as analysts questioned Eagle's value and FL Group said it had sold most of its holdings at a loss.

American last commented on the divestiture at an October investor conference, where CFO Tom Horton reiterated that a spinoff is expected to take place this year. He said it hasn't been decided whether the spinoff will be to shareholders or to a third party.

Horton also said the company expects American Eagle "to remain our regional partner for many years to come," which is key because Eagle's principal asset is its contract with American. The other essential in the regional business is low costs, in order to gain contracts from major carriers.

Major airlines spent nearly $17 billion to buy capacity from regional carriers in 2006, a fourfold increase from 2002, says Bill Swelbar, a research engineer in MIT's International Center for Air Transportation and an airline industry consultant. More recently, Swelbar wrote at swelblog.com, regional airline growth has slowed and the time for consolidation in the sector may have arrived.

In Swelbar's view, the Eagle deal is about American "pursuing the clean-up of its balance sheet."

Potential buyers might include existing regional carriers "looking to assure their survival as

this sector of the industry matures." A deal has value for American, he says, even though, "I am in no way saying that divestitures are going to command previous values."

As for Delta, the carrier said last fall that it's open to spinning off Comair and would make a decision over the next few months. In November, Delta said it had formed a board of directors committee to analyze strategic options including potential mergers.

Consolidation "is a front burner issue for us," Delta president Ed Bastian said at the time. "We're looking at the question

in real time."

For now, it's clear, the Comair sale remains on the back burner.