EX-99.1 2 d83913exv99w1.htm EX-99.1 exv99w1
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Exhibit 99.1
 
[AMR Letterhead]
 
[•], 2011
 
Dear AMR Stockholder:
 
We are pleased to inform you that on [•], 2011, the board of directors of AMR Corporation (“AMR”) approved the spin-off of AMR Eagle Holding Corporation (“Eagle”), a wholly-owned subsidiary of AMR, which will be renamed prior to the spin-off. Upon completion of the spin-off, AMR stockholders will own 100% of the outstanding shares of common stock of Eagle, which will operate a regional flight operations business serving American Airlines and a ground handling services business serving American Airlines and other passenger airlines. We believe this separation into two independent, publicly-traded companies is in the best interests of both AMR and Eagle.
 
The spin-off will be completed by way of a pro rata dividend of Eagle shares held by AMR to our stockholders of record as of 5:00 p.m., New York City time, on [•], 2011, the spin-off record date. AMR stockholders will be entitled to receive one share of Eagle common stock for every [•] shares of AMR common stock they hold on the record date. The dividend will be issued in book-entry form only, which means no physical stock certificates will be issued. No fractional shares of Eagle common stock will be issued. If you would have been entitled to a fractional share of Eagle common stock in the distribution, you will receive the net cash proceeds from the sale of such fractional share instead.
 
The distribution of Eagle common stock is subject to certain customary conditions. Stockholder approval of the distribution is not required, and you will not need to take any action to receive shares of Eagle common stock.
 
Immediately following the distribution of Eagle common stock, you will own shares of common stock of both AMR and Eagle. AMR common stock will continue to trade on the New York Stock Exchange under the symbol “AMR.” Eagle intends to list its common stock on the [•] under the symbol “[•].”
 
We expect the distribution of Eagle common stock to be tax-free to the stockholders of AMR, except with respect to any cash received in respect of fractional shares. The distribution is conditioned on the receipt of a private letter ruling from the Internal Revenue Service and an opinion of counsel, in each case, substantially to the effect that for U.S. Federal income tax purposes the distribution (i) will qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended, (ii) will not result in taxable gain or loss to AMR (apart from certain transactions occurring prior to the spin-off) and (iii) will not result in gain or loss to the stockholders of AMR, except to the extent of cash received in respect of fractional shares.
 
The enclosed Information Statement, which is being mailed to the stockholders of AMR, describes the spin-off and contains important information about Eagle, including its historical consolidated financial statements.
 
We look forward to your continued support.
 
Sincerely,
 
Gerard J. Arpey
Chairman and Chief Executive Officer


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[•], 2011
 
Dear AMR Eagle Holding Corporation Stockholder:
 
It is my pleasure to welcome you as a stockholder of our company, AMR Eagle Holding Corporation (“Eagle”). We are a leading regional airline that provides both regional flight operations and ground handling services throughout North America.
 
As an independent, publicly-traded company, we believe we can more effectively focus on our objectives and satisfy the strategic needs of our company. In connection with the distribution of our common stock by AMR, we intend to list our common stock on the [•] under the symbol “[•].”
 
I invite you to learn more about Eagle by reviewing the enclosed Information Statement. We look forward to your support as a holder of Eagle common stock.
 
Sincerely,
 
Daniel P. Garton
President and Chief Executive Officer


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
 
PRELIMINARY INFORMATION STATEMENT
SUBJECT TO COMPLETION, DATED AUGUST 11, 2011
 
INFORMATION STATEMENT
 
AMR EAGLE HOLDING CORPORATION
 
4333 Amon Carter Blvd.
Fort Worth, Texas 76155

Common Stock
(par value $0.01)
 
This Information Statement is being sent to you in connection with the spin-off by AMR Corporation (“AMR”) of its wholly-owned subsidiary, AMR Eagle Holding Corporation (“Eagle”). To effect the spin-off, AMR will distribute all of the shares of Eagle common stock on a pro rata basis to the holders of AMR common stock. It is expected that the distribution of Eagle common stock will be tax-free to AMR stockholders for U.S. Federal income tax purposes, except to the extent of any cash received in respect of fractional shares.
 
Every [•] shares of AMR common stock outstanding as of 5:00 p.m., New York City time, on [•], 2011, the record date for the distribution, will entitle the holder thereof to receive one share of Eagle common stock. The distribution of shares will be made in book-entry form. AMR will not distribute any fractional shares of Eagle common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the distribution.
 
The distribution will be effective as of 11:59 p.m., New York City time, on [•], 2011. Immediately after the distribution becomes effective, Eagle will be an independent, publicly-traded company.
 
No vote or further action of AMR stockholders is required in connection with the distribution. We are not asking you for a proxy and request that you do not send us a proxy. AMR stockholders will not be required to pay any consideration for the shares of Eagle common stock they receive in the distribution, and they will not be required to surrender or exchange shares of their AMR common stock or take any other action in connection with the distribution.
 
All of the outstanding shares of Eagle common stock are currently owned by AMR. Accordingly, there is no current trading market for Eagle common stock. We expect, however, that a limited trading market for Eagle common stock, commonly known as a “when-issued” trading market, will develop prior to the distribution and continue through the distribution date, and we expect “regular-way” trading of Eagle common stock will begin the first trading day after the distribution date. We intend to list Eagle common stock on the [•] under the symbol “[•].”
 
In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 19 of this Information Statement.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.
 
This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.
 
The date of this Information Statement is [•], 2011.
 


 

 
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SUMMARY
 
This summary highlights selected information from this Information Statement and provides an overview of our company, our separation from AMR and the distribution of our common stock by AMR to its stockholders. For a more complete understanding of our business and the separation and distribution, you should read the entire Information Statement carefully, particularly the discussion set forth under “Risk Factors,” and our audited and unaudited historical and pro forma consolidated financial statements and notes to those statements appearing elsewhere in this Information Statement.
 
Unless the context otherwise requires, references in this Information Statement to (i) “Eagle,” the “Company,” “we,” “our” and “us” refer to AMR Eagle Holding Corporation and its consolidated subsidiaries, after giving effect to the reorganization, separation and distribution and (ii) “AMR” refers to AMR Corporation and its consolidated subsidiaries (other than Eagle), including American Airlines, Inc. (“American”). The transactions that involve transferring, assigning or reallocating the various assets and past and future liabilities and obligations between Eagle and AMR, the recapitalization of Eagle and the cash contribution from AMR to us as further described herein, are referred to as the “reorganization.” The transaction in which AMR will distribute to its stockholders all of the shares of our common stock is referred to as the “distribution.” The transaction in which we will be separated from AMR is referred to as the “separation” or the “spin-off.”
 
Our Company
 
We are a leading regional airline that provides both regional flight operations and ground handling services throughout North America. Currently, we are the third largest regional airline in the U.S. based on aircraft operated, and we believe we are one of the largest ground handlers in the U.S. based on departures handled. We provide regional flight operations to American and ground handling services to passenger airlines, including American and 13 other airlines. At July 1, 2011, we had an active regional aircraft fleet of 281 aircraft providing 1,653 daily regional flight departures throughout the U.S., the Bahamas, the Caribbean, Mexico and Canada, and provided ground handling services for 1,619 daily departures at more than 100 airports across the U.S., the Bahamas, the Caribbean and Canada. Through our long operating history, we have developed significant competitive strengths, including a strong and long-standing relationship with American, a highly skilled workforce, a broad geographic footprint, an experienced management team and significant experience providing a wide range of services. Our business strategy is to reduce our operating costs, maintain our long-standing relationship with American, diversify and expand our regional flight operations business with other airlines and continue to expand our ground handling business with American and other airlines.
 
Prior to the spin-off, we will enter into an Air Services Agreement with American (the “Air Services Agreement”), which will have a nine-year term as of the distribution date. In addition, we will have additional agreements with AMR and American, including an eight-year Master Ground Handling Agreement (the “Ground Handling Agreement”) covering 106 airport locations, which will become effective on the distribution date. We believe the Air Services Agreement and Ground Handling Agreement will provide us with a predictable, on-going revenue base for several years following the spin-off. For the six months ended June 30, 2011, on a pro forma basis, we generated $649.8 million of total operating revenues, $4.9 million of total operating income and $3.4 million of net income. For the six months ended June 30, 2011, on a pro forma basis, regional flight operations and ground handling services accounted for approximately 80% and 20% of our total operating revenues, respectively.
 
We are a holding company that operates our businesses primarily through two wholly-owned subsidiaries, American Eagle Airlines, Inc. (“American Eagle”) and Executive Airlines, Inc. (“Executive”), which both hold operating certificates from the Federal Aviation Administration (“FAA”). Following the spin-off, we will continue to provide regional flight operations using the “American Eagle” tradename. Until completion of the spin-off, we will remain a wholly-owned subsidiary of AMR.


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Business Overview
 
Our Regional Flight Operations Business.  We seek to provide regional flight operations for mainline carriers’ network needs. Upon completion of the spin-off, we will initially provide regional flight operations solely to American pursuant to the Air Services Agreement. As an independent company, we will seek to maintain this business with American and pursue new opportunities to provide regional flight operations to other airlines.
 
At July 1, 2011, our regional flight operations business:
 
  •  provided 93% of the regional flight operations for American;
 
  •  operated 281 active aircraft;
 
  •  offered scheduled passenger service to 182 cities, with 1,653 daily departures; and
 
  •  was the single largest regional flight operator based on seat capacity at Dallas/Fort Worth International Airport (DFW), New York LaGuardia Airport (LGA), Chicago O’Hare International Airport (ORD), Miami International Airport (MIA) and Luis Munoz Marin International Airport in San Juan, Puerto Rico (SJU).
 
For the six months ended June 30, 2011, our controllable completion factor was reported at 98.9%.
 
Our Ground Handling Business.  Our ground handling business provides American and other mainline carriers and regional flight operators with a comprehensive range of passenger and ramp services. The range of passenger services we provide includes passenger check-in and ticketing, passenger gate operations, baggage services, skycap services, wheelchair assistance and intra-airport transportation. The range of ramp services we provide includes aircraft parking, pushback and towing, baggage handling, aircraft cleaning, de-icing services and water and lavatory services. Typically, we provide our customers with custom ground handling solutions to meet their particular needs at each location.
 
We have been providing ground handling services since 1984. We believe our more than 6,400 ground handling employees, broad geographic footprint and experience operating in a large hub environment provide us with a distinct competitive advantage in providing ground handling services to American and other airlines.
 
At July 1, 2011, our ground handling business:
 
  •  handled 1,619 departures per day;
 
  •  provided ground handling services at more than 100 airports;
 
  •  provided ground handling services for 14 airline customers, including American; and
 
  •  was the only provider of ground handling services to scheduled airlines at 12 of our ground handling locations.
 
Agreements with AMR and Its Affiliates
 
Prior to the spin-off, we will enter into various agreements with AMR and American, including the Air Services Agreement and the Ground Handling Agreement. The Air Services Agreement and the Ground Handling Agreement will provide us with substantially all of our revenue immediately after the spin-off, which will be based on pre-set rates, subject to certain adjustments.
 
Air Services Agreement.  Under the Air Services Agreement with American, we will operate 245 regional jet aircraft and 36 Super ATR turbo-prop aircraft on behalf of American. The Air Services Agreement will designate American Eagle and Executive to operate flights under American’s AA flight designator code, or such other flight designator codes as directed by American. American will control and be responsible for our scheduling, ticket pricing and seat inventories. American will be entitled to all ticket, cargo and ancillary revenues associated with the operation of the aircraft and will be responsible for all revenue-related expenses, including commissions, reservations and passenger ticket processing expenses. All of the aircraft we plan to use to provide regional flight operations to American under the Air Services Agreement


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will be leased or subleased from American under agreements that expire before or contemporaneously with any termination of the Air Services Agreement.
 
We will be responsible for the operation and maintenance of the aircraft under the Air Services Agreement. Following the spin-off, American will compensate us on a monthly basis for the regional flight operations we provide in accordance with established pre-set rates, which we believe are current market rates. In addition, under the Air Services Agreement, certain costs incurred by us will be reimbursed by American at our out-of-pocket cost with no mark-up, such as landing fees and insurance premiums, and certain costs of our operations will be incurred directly by American, such as fuel and the costs of passenger handling services.
 
Ground Handling Agreement.  Following the spin-off, we will provide ground handling services for American’s flight operations at 106 airport locations pursuant to the Ground Handling Agreement. The services we provide and the rates at which we are compensated will be specified on an airport-by-airport basis. For providing ground handling services, American will compensate us through a pre-set rate per actual arrival and subsequent departure of a handled aircraft at a particular airport, subject to certain adjustments. In addition, we will be reimbursed at our costs for certain additional charges, such as catering, de-icing fluids and other supplies provided by us, specified third party services and certain taxes and fees.
 
For more information on these agreements and the other agreements we plan to enter into with AMR and its affiliates, see “Agreements with AMR and Its Affiliates.”
 
Our Strengths
 
We believe we are well positioned to execute our business strategy and benefit from current airline industry trends due to the following competitive strengths:
 
General
 
Strong and Longstanding Relationship with American.  Our over 25-year relationship with American provides us with a competitive strength among regional airlines and ground handling service providers and positions us to earn a significant amount of business from American if it expands its business or after the Air Services Agreement and Ground Handling Agreement expire. At July 1, 2011, we provided 93% of the regional flight operations and 85% of the ground handling services for American’s regional flights. Notwithstanding American’s desire to diversify its regional flight operations, the services we provide are important to American’s overall strategy and there would be significant costs to American if it decided to move most or all of its regional business to other regional carriers in a short period of time. In addition, American’s current labor agreement with the Allied Pilots Association restricts American’s ability to use regional carriers other than us for flying the CRJ-700 aircraft on its behalf.
 
Contractual Relationships at Market Rates.  Following the spin-off, the Air Services Agreement and Ground Handling Agreement with American will provide us with a predictable source of revenue for the designated contract terms, subject to certain adjustments and reset rights. Although American will have the right to withdraw certain aircraft from the Air Services Agreement or withdraw ground handling services at certain airports from the Ground Handling Agreement prior to the expiration of the specified terms of the agreements, we believe the predictability of this source of revenue as a result of the contractual relationship with American should reduce our financial risk and enhance our ability to implement our strategy. Additionally, following the spin-off, these agreements will reflect what both we and American believe are current market rates for these services. We believe aligning our cost structure with the rates we receive from American should enable us to compete successfully for additional business.
 
History of Positive Labor Relations.  We have a highly skilled workforce with over 7,100 aviation professionals and over 6,400 ground handling employees. A significant portion of our employees are represented by collective bargaining groups. We believe our employees are one of our greatest assets, and our management believes that maintaining positive relationships with our employees has been, and will continue to be, key to our success. Our management continues to work with representatives of our collective bargaining groups to develop creative solutions to issues facing our business and the industry in general.


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Experienced Executive Team.  Our senior executive team collectively has over 100 years of experience across varying specialties in the airline industry, with an average of 20 years of individual airline experience. Our experienced leadership better positions us to provide our customers with the highest quality service, to anticipate our customers’ priorities and objectives and to pursue growth opportunities in the regional airline and ground handling markets.
 
Significant Net Operating Loss Carryover.  In connection with the spin-off, we will be allocated a portion of AMR’s net operating loss (“NOL”) carryover balance for U.S. Federal income tax purposes. We estimate that the allocated portion of the NOL carryover following the distribution will be approximately $800 million and will, under certain conditions, be available to us to offset a significant portion of any cash obligations we will owe for our future U.S. Federal income taxes. These NOLs expire between 2022 and 2029.
 
Regional Flight Operations
 
One of the Largest Regional Airlines in the U.S.  We are the third largest regional airline in the U.S. based on aircraft operated and the fourth largest regional airline in the U.S. based on passengers carried, with experience operating aircraft ranging from 37- to 66-seat capacity, including 2-class aircraft. To support our geographically diversified operations, we have established a network of operations facilities, pilot bases and maintenance facilities throughout North America, which we believe can support future growth. In addition, in our largest markets, we believe we have consistently achieved among the highest performance results when compared to other regional airlines, including our controllable completion factor and our on-time performance. We believe our experience with a diversified range of aircraft types and network of established locations and facilities will allow us to compete successfully for new business.
 
Lower Risk Airline Operations.  As a regional airline operating under the Air Services Agreement, which is a capacity purchase agreement, we will have a fundamentally different business model from a mainline carrier. Under the Air Services Agreement, we will have no passenger revenue risk or fuel risk, which provides us with a more predictable per flight revenue stream than a mainline carrier. In addition, we will have no residual aircraft liability on the aircraft we operate for American under the Air Services Agreement because the aircraft will be leased or subleased to us by American, and the leases will terminate before or contemporaneously with any termination of the Air Services Agreement. As a result, following the completion of the spin-off, we will have no aircraft debt and all aircraft rental payments will be paid directly or reimbursed by American. Upon expiration of any underlying aircraft lease or sublease, American will be solely responsible for redeploying the aircraft. Because we will have no long-term debt upon completion of the spin-off, we believe we will have a conservative capital structure.
 
Ground Handling Services
 
Broad Geographic Footprint and Significant Market Presence.  At July 1, 2011, we had ground handling operations at more than 100 airports in the U.S., the Bahamas, the Caribbean and Canada and we have a strong record of providing ground handling services to American for its mainline and regional operations, including at large airports where the high numbers of connecting passengers make operations more complex. This market presence, scale and know how allows us to be a low-cost provider in these markets and enhances our ability to attract new customers and retain our existing customers. We also provide ground handling services to Air Georgian, AirTran Airways, Allegiant Air, British Airways, Continental for Continental Express, Delta for Delta Connection, Frontier Airlines, Alaska Airlines, Jazz Air, JetBlue Airways, Spirit Airlines, Sun Country Airlines and US Airways for US Airways Express. Although our customers other than American only represented 5% of our ground handling services revenue for the six months ended June 30, 2011, we believe our geographic reach, market presence and experience with sophisticated operations should enable us to compete for new business at our existing and new locations for a broader universe of potential customers.
 
Wide Range of Ground Handling Services.  We provide our customers with a wide range of services from aircraft arrival through departure. By providing a broad range of services, we are able to build on existing customer relationships and cross-sell our services. For example, when we attract a new customer for


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baggage loading, we may offer that customer additional services such as aircraft cleaning, de-icing or passenger ticketing at the same or another airport.
 
Our Strategy
 
To maintain our existing American business and expand our operations and our customer base, we plan to implement the following strategies:
 
Regional Flight Operations
 
Reduce Our Operating Costs.  Over the last several years, we have implemented a series of initiatives to lower our operating costs, including increasing productivity of airport employees and lowering headcount through the use of software and hardware technology, increasing the efficiency of our maintenance programs through the use of new software systems and outsourcing the process of selecting and scheduling crew hotels. Despite the success of these initiatives, we currently have higher labor costs than our competitors, primarily due to the higher average level of seniority relative to our competitors of our employees that are represented by collective bargaining groups. We have had, and continue to have, ongoing discussions with our collective bargaining groups to develop other initiatives to improve productivity, lower costs and provide better long-term job prospects. We believe our seniority will be reduced as mainline carriers grow and seek to hire our more experienced personnel to fill open positions and as our senior employees reach retirement age. In addition, our current pilots have the option to transfer to American as positions with American become available.
 
Maintain Our Business with American.  We and our predecessors have flown primarily for American since 1984. At July 1, 2011, we provided 93% of American’s regional flight operations. Although American’s objective is to reduce this dependence on us over time through diversification of its regional feed, we believe our long-established relationship with American positions us well to earn a significant amount of our existing business when our agreements with American expire. We intend to aggressively manage our costs and work closely with American to provide excellent customer service and offer efficient, reliable and high quality regional flight operations.
 
Pursue Growth Opportunities with Other Mainline Carriers.  We have two operating certificates, which provides us with the flexibility to fly for other airlines. We believe there will be significant opportunities to compete for regional flight operations business over the next five years due to the expiration of existing agreements with other regional carriers. We estimate that 14 aircraft contracts for regional flight operations covering 276 aircraft will expire through 2016. In addition, between 2000 and 2009, regional airlines increased their share of domestic capacity from 4% to 13%. Earlier this year, the FAA forecasted that regional capacity will grow at an average of 4% per year through 2030 compared to an average of 2.7% per year for mainline carriers. With these industry trends, our long track record of providing high quality, reliable regional flight operations to one of the world’s largest airlines, and with the flexibility provided by our operating certificates, we believe we will be well positioned to compete for the regional flight operations of other mainline carriers.
 
Ground Handling Services
 
Grow Our Customer Base at Existing Locations.  We intend to market our wide range of ground handling services and broad geographic presence to increase our customer base across our existing network of more than 100 airports. We believe our diversified services and broad geographic presence will provide us with a competitive advantage when offering our services to potential new customers. Further, as a result of our established market position, in many cases we can offer services to new customers without incurring additional fixed costs, which we believe gives us a competitive advantage when we compete for new business at locations where we already operate. We are currently the only company providing ground handling services to scheduled airlines at 12 locations where we operate and one of only two companies providing ground handling services to scheduled airlines at 13 locations where we operate, which positions us well for additional business at these locations. We believe that as an independent company, we will have a greater opportunity to invest in our ground handling business to pursue new customer opportunities at our existing locations.


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Cross-Sell Our Ground Handling Services.  By providing a broad range of ground handling services at a large number of airports, we believe we are well positioned to cross-sell additional services to our customers, including at additional locations. For example, at one of our major locations, we recently expanded our operations to include skycap and special assistance services. As mainline carriers continue to focus on their core flying operations, we believe they will outsource more ground handling services, which will provide us with the opportunity to cross-sell our services.
 
Expand to New Ground Handling Locations.  We intend to continue the long-term expansion of our ground handling operations with selective development of additional domestic locations. Historically, our ability to invest in our ground handling business was controlled by American, which limited our ability to invest in new third-party business. As an independent company, we believe we will have a greater ability to invest in growth opportunities as they arise, including through potential acquisitions of other ground handling operators.
 
Other Information
 
We are a Delaware corporation. Our principal executive offices are located at 4333 Amon Carter Blvd., Fort Worth, Texas 76155. Our telephone number is 1-817-[•]-[•]. Our website address is www.[•].com. Information contained on, or connected to, our website or AMR’s website does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is part.
 
The Spin-Off
 
Overview
 
On [•], 2011, the AMR board of directors approved the complete legal and structural separation of Eagle from AMR, following which Eagle will be an independent, publicly-traded company.
 
Prior to the spin-off, we will enter into a Separation and Distribution Agreement and additional agreements with AMR and American, including the Air Services Agreement and Ground Handling Agreement. These agreements will govern the relationship between Eagle and AMR and its affiliates up to and subsequent to the completion of the separation, provide for the transfer, assignment or reallocation of assets and past and future liabilities and obligations between Eagle and AMR and its affiliates, and set forth the terms and conditions for the business and services conducted between Eagle and our affiliates, on the one hand, and AMR and its affiliates, on the other hand, following the spin-off. See “Agreements with AMR and Its Affiliates” for more detail.
 
The distribution of our common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. In addition, AMR has the right not to complete the distribution if, at any time, the board of directors of AMR determines, in its sole discretion, that the spin-off is not in the best interests of AMR or its stockholders, or that market conditions are such that it is not advisable to separate Eagle from AMR. See “The Spin-Off — Conditions to the Distribution” for more detail.


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Questions and Answers about the Spin-Off
 
The following provides only a summary of the terms of the spin-off. You should read the section entitled “The Spin-Off” for a more detailed description of the matters described below.
 
Q: What is the spin-off?
 
A: The spin-off is the method by which we will separate from AMR. In the spin-off, AMR will distribute to its stockholders all of the shares of our common stock that it owns. Following the distribution, we will be an independent, publicly-traded company, and AMR will not retain any ownership interest in us. The number of shares of AMR common stock you own will not change as a result of the distribution.
 
Q: Why is the separation of Eagle structured as a distribution?
 
A: AMR believes that a tax-free distribution of our shares is the most efficient way to separate our business from AMR in a manner that will improve flexibility and benefit both AMR and us and create long-term value for AMR stockholders.
 
Q: What will I receive in the distribution?
 
A: As a holder of AMR common stock, you will receive a distribution of one share of our common stock for every [•] shares of AMR common stock held by you on the record date. Your proportionate interest in AMR will not change as a result of the distribution. For a more detailed description, see “The Spin-Off.”
 
Q: What is being distributed in the distribution?
 
A: Approximately [•] million shares of our common stock will be distributed to AMR stockholders, based on the number of shares of AMR common stock expected to be outstanding as of the record date. The actual number of shares of our common stock to be distributed will be calculated on [•], 2011, the record date. The shares of our common stock to be distributed by AMR will constitute all of the issued and outstanding shares of our common stock immediately prior to the distribution. For more information on the shares being distributed, see “Description of Our Capital Stock — Common Stock.”
 
Q: What is the record date for the distribution?
 
A: Record ownership will be determined as of 5:00 p.m., New York City time, on [•], 2011 (“the record date”).
 
Q: When will the distribution occur?
 
A: The distribution date of the spin-off is [•], 2011.
 
Q: What do I have to do to participate in the distribution?
 
A: No action is required on your part. Stockholders of AMR entitled to receive our common stock are not required to pay any cash or deliver any other consideration, including any shares of AMR common stock, to receive the shares of our common stock distributable to them in the distribution.
 
Q: If I sell, on or before the distribution date, shares of AMR common stock that I held on the record date, am I still entitled to receive shares of Eagle common stock distributable with respect to the shares of AMR common stock that I sold?
 
A: If you decide to sell any of your shares of AMR common stock on or before the distribution date, you may also be selling your right to receive shares of Eagle. If you plan to sell your shares of AMR common stock prior to the distribution date, you should consult with your stockbroker, bank or other nominee and discuss whether you want to sell your AMR common stock or the Eagle common stock you will receive in the distribution, or both. See “The Spin-Off — Trading Prior to the Distribution Date” for more information.


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Q: How will AMR distribute shares of our common stock?
 
A: Holders of shares of AMR common stock on the record date will receive shares of our common stock in book-entry form. See “The Spin-Off — Manner of Effecting the Spin-Off” for a more detailed explanation.
 
Q: How will fractional shares be treated in the distribution?
 
A: No fractional shares will be distributed in connection with the distribution. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each AMR stockholder who would otherwise have been entitled to receive a fractional share in the distribution. See “The Spin-Off — Treatment of Fractional Shares” for a more detailed explanation.
 
Q: What are the reasons for the spin-off?
 
A: The board of directors of AMR considered the following potential benefits in making its determination to pursue the spin-off:
 
• Improved Positioning for Eagle’s Growth.  As part of a combined company, Eagle’s growth initiatives were limited in terms of available funding, resources and prioritization, as compared to American’s other business operations. Eagle’s ability to pursue regional flight operations and ground handling business with other airlines was also limited because of its ownership by American, a competitor airline. The separation of Eagle should provide Eagle with more flexibility to conduct its operations, invest in its business and pursue growth opportunities.
 
• Maximizing Eagle’s Potential.  The separation of Eagle should also provide Eagle with more flexibility to restructure its operations and operating costs, as appropriate or necessary, to reflect current market forces and compete more effectively in the market. Any such restructuring should increase the probability of long-term success of Eagle and should position Eagle competitively to retain and earn a portion of American’s existing or new business and to pursue other growth opportunities.
 
• Potential Diversification of American’s Regional Flight Operations.  Although American will commit to having Eagle initially provide regional flight operations for a nine-year term following the spin-off, American believes that the separation of Eagle and the ability to withdraw aircraft during the term of the Air Services Agreement will provide American with the flexibility to seek additional and future regional flight capacity from other regional airlines. This potential diversification of American’s regional feed will enhance American’s ability to continue to source regional flight operations at competitive market rates. In addition, diversification of American’s regional feed would reduce the risks associated with dependence on primarily one provider for regional flight operations.
 
• Capital Allocation and Availability.  As separate entities, AMR and Eagle will have more efficient capital structures through which to fund their growth. The separated companies will not compete internally for capital and both companies will have more flexibility to access capital markets. This will also provide each company’s management more control over capital resources from which to make strategic investments in their respective businesses. As a wholly-owned private company, Eagle was limited in funding its business operations solely from AMR. As an independent, publicly-traded company, Eagle should have greater access to more diverse sources of financing.
 
• Investor Choice.  The spin-off will allow investors to make independent investment decisions with respect to AMR and Eagle. Investment in one or the other company may appeal to investors with different goals, interests and concerns.


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Q: What will be the relationship between AMR and Eagle following the spin-off?
 
A: Prior to the spin-off, we will enter into a Separation and Distribution Agreement and additional agreements with AMR and American, including the Air Services Agreement and Ground Handling Agreement. These agreements will govern the relationship between Eagle and AMR and its affiliates up to and subsequent to the completion of the separation, provide for the transfer, assignment or reallocation of assets and past and future liabilities and obligations between Eagle and AMR and its affiliates, and set forth the terms and conditions for the business and services conducted between Eagle and our affiliates, on the one hand, and AMR and its affiliates, on the other hand, following the spin-off. We describe these arrangements in greater detail under “Agreements with AMR and Its Affiliates.”
 
Q: What are the U.S. Federal income tax consequences to me of the distribution?
 
A: The distribution is conditioned on the receipt by AMR, on or before the distribution, of a private letter ruling from the Internal Revenue Service (the “IRS”) and a favorable opinion of Baker Botts L.L.P., confirming that the distribution will qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). AMR may waive receipt of either or both of the private letter ruling or opinion as a condition to the distribution. Assuming the distribution qualifies as a tax-free distribution, you will recognize no gain or loss for U.S. Federal income tax purposes, and no amount will be included in your income upon the receipt of shares of our common stock in the distribution. You will generally recognize gain or loss with respect to cash received in respect of fractional shares of our common stock.
 
Immediately after the distribution, each AMR stockholder will have an aggregate tax basis in its AMR common stock and our common stock received in the distribution (including any fractional interests to which the stockholder would be entitled) equal to the aggregate tax basis of the AMR common stock it held immediately before the distribution. The aggregate tax basis will be allocated between the common stock of AMR and our common stock in proportion to their relative fair market values on the distribution date.
 
See “The Spin-Off — Material U.S. Federal Income Tax Consequences of the Distribution” and “Risk Factors — Risks Relating to the Spin-Off” for more information regarding the potential tax consequences to you of the distribution.
 
Q: Does Eagle intend to pay cash dividends?
 
A: We intend to retain future earnings for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends for the foreseeable future. See “Dividend Policy” for more information.
 
Q: How will Eagle common stock trade?
 
A: Currently, there is no public market for our common stock. We intend to list our common stock on the [•] under the symbol “[•].”
 
We anticipate that trading of Eagle common stock will commence on a “when-issued” basis prior to the distribution date. When-issued trading refers to the purchase and sale of our common stock on or before the distribution date on a conditional basis because our shares of common stock will have been authorized but will not yet have been issued. On the first trading day following the distribution date, any when-issued trading in respect of our common stock will end and “regular-way” trading will begin. Regular-way trading refers to trading after the security has been distributed. See “The Spin-Off — Trading Prior to the Distribution Date” for more information. We cannot predict the trading prices for our common stock before or after the distribution date.
 
Q: Will the distribution affect the trading price of my AMR common stock?
 
A: Yes. We expect the trading price of shares of AMR common stock immediately following the distribution to be lower than immediately prior to the distribution because its trading price will no longer reflect the


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value of the Eagle business. Furthermore, until the market has fully analyzed the value of AMR without the Eagle business, the price of shares of AMR common stock may trade with increased volatility.
 
Q: Do I have appraisal rights?
 
A: No. Holders of AMR common stock are not entitled to appraisal rights in connection with the distribution.
 
Q: Who is the transfer agent for Eagle common stock?
 
A: We have not yet determined who the transfer agent for our common stock will be, but we expect to do so prior to the distribution and we will provide further information in an amendment to this Information Statement.
 
Q: Are there risks associated with owning shares of Eagle common stock?
 
A: Our business is subject to both general and specific risks and uncertainties. Our business is also subject to risks relating to the spin-off. Following the spin-off, we will also be subject to risks relating to being an independent, publicly-traded company. For more information on these risks, you should read carefully the information set forth in the section entitled “Risk Factors.”
 
Q: Where can I get more information?
 
A: If you have any questions relating to the mechanics of the distribution, you should contact the distribution agent at:
 
[•]
[•]
[•]
Phone: [•]
 
Before the spin-off, if you have any questions relating to the separation, you should contact AMR at:
 
Investor Relations
AMR Corporation
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
Phone: 1-817-[•]-[•]
 
After the spin-off, if you have any questions relating to Eagle, you should contact us at:
 
Investor Relations
AMR Eagle Holding Corporation
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
Phone: 1-817-[•]-[•]


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Summary of the Spin-Off
 
Distributing Company: AMR Corporation, a Delaware corporation and parent company to Eagle. After the distribution, AMR will not own any shares of our common stock.
 
Distributed Company: Eagle, a Delaware corporation and a wholly-owned subsidiary of AMR prior to the spin-off. After the distribution, we will be an independent, publicly-traded company.
 
Distributed Securities: All of the shares of our common stock that are owned by AMR, which will be 100% of our common stock issued and outstanding immediately prior to the distribution.
 
Record Date: The record date is [•], 2011.
 
Distribution Date: The distribution date is [•], 2011.
 
Reorganization: Prior to or contemporaneously with the distribution, among other things, (i) all of our jet aircraft and certain intercompany receivables owed to us by American (including our $293 million account receivable due from American at June 30, 2011), will be transferred to American; (ii) in consideration for the transfer of the jet aircraft by us to American, American will take the jet aircraft subject to, and we will be released from, indebtedness related to the aircraft, on which AMR is already the guarantor; (iii) certain of the fixed assets, including leasehold improvements and certain ground handling assets, that relate to our regional flight operations and ground handling services will be transferred from Eagle to American; (iv) certain of the airport leasehold interests relating to our regional flight operations and ground handling services will be assigned to American, to the extent permitted by third parties; (v) all airport operating rights relating to our regional flight operations will either be corrected or reallocated to American, to the extent permitted by third parties; (vi) we will effect a recapitalization so that the number of outstanding shares of our common stock will be equal to the number of shares to be distributed by AMR in the distribution; (vii) certain payables aggregating approximately $135 million at June 30, 2011, will be retained by us, but American or AMR will agree to be responsible for, and we will be released from, certain other payables, workers’ compensation liabilities and accrued interest (totaling approximately $50 million at June 30, 2011) that we previously incurred on their behalf; (viii) any remaining intercompany payables and receivables between us and our affiliates, on the one hand, and AMR and its other affiliates, on the other hand, that have not been previously settled, will be settled; and (ix) AMR will make a capital contribution to us currently contemplated to be approximately $50 million in cash. For more information, see “Agreements with AMR and Its Affiliates.”
 
Distribution Ratio: Every [•] shares of AMR common stock outstanding as of 5:00 p.m., New York City time, on the record date, will entitle the holder thereof to receive one share of our common stock. Please note that if you sell your shares of AMR common stock on or before the distribution date, the buyer of those shares may in


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certain circumstances be entitled to receive the shares of our common stock issuable in respect of the shares sold. See “The Spin-Off — Trading Prior to the Distribution Date” for more detail.
 
The Distribution: On the distribution date, AMR will release the shares of our common stock to the distribution agent to distribute to AMR stockholders. The distribution of shares will be made in book-entry form. You will not be required to make any payment, surrender or exchange your shares of AMR common stock or take any other action to receive your shares of our common stock.
 
Fractional Shares: The distribution agent will not distribute any fractional shares of our common stock to AMR stockholders. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds from the sales, net of brokerage fees and other costs, pro rata to each AMR stockholder who would otherwise have been entitled to receive a fractional share in the distribution. Recipients of cash in respect of fractional shares will not be entitled to any interest on the payments made in respect of fractional shares. The receipt of cash in respect of fractional shares generally will be taxable to the recipient stockholders as described in “The Spin-Off — Material U.S. Federal Income Tax Consequences of the Distribution.”
 
Conditions to the Distribution: The distribution is subject to the satisfaction or waiver by AMR of the following conditions:
 
• the board of directors of AMR shall have authorized and approved the separation and distribution and not withdrawn such authorization and approval, and shall have declared the dividend of Eagle common stock to AMR stockholders;
 
• the Separation and Distribution Agreement and each ancillary agreement contemplated by the Separation and Distribution Agreement shall have been executed by each party thereto;
 
• the Securities and Exchange Commission (the “SEC”) shall have declared effective our Registration Statement on Form 10, of which this Information Statement is a part, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and no stop order suspending the effectiveness of the Registration Statement shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the SEC;
 
• our common stock shall have been accepted for listing on the [•] or another national securities exchange approved by AMR, subject to official notice of issuance;
 
• the reorganization shall have been completed to the satisfaction of AMR;
 
• AMR shall have received a private letter ruling from the IRS and an opinion from Baker Botts L.L.P., in each case, substantially to the effect that for U.S. Federal income tax purposes, the distribution (i) will qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, (ii) will not result in


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taxable gain or loss to AMR (apart from gain recognition on the transfer of aircraft and certain other assets from Eagle to American prior to the spin-off), and (iii) will not result in gain or loss to the stockholders of AMR, except to the extent of cash received in respect of fractional shares;
 
• no order, injunction or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution shall be in effect, and no other event outside the control of AMR shall have occurred or failed to occur that prevents the consummation of the distribution;
 
• no other events or developments shall have occurred prior to the distribution date that, in the judgment of the board of directors of AMR, would result in the spin-off having a material adverse effect on AMR or its stockholders;
 
• prior to the distribution date, this Information Statement shall have been mailed to the holders of AMR common stock as of the record date;
 
• AMR, the current stockholder of Eagle, shall have duly elected the individuals listed in this Information Statement as members of our post-distribution board of directors, and such individuals shall be the members of our board of directors immediately after the distribution;
 
• immediately prior to the distribution date, our amended and restated certificate of incorporation and amended and restated by-laws, each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, shall be in effect; and
 
• the AMR board shall have received an opinion from a third party financial advisor relating to the solvency and capital adequacy of AMR following the distribution.
 
The fulfillment of the foregoing conditions will not create any obligation on the part of AMR to effect the distribution. AMR has the right not to complete the distribution if, at any time, the board of directors of AMR determines, in its sole discretion, that the spin-off is not in the best interests of AMR or its stockholders, or that market conditions are such that it is not advisable to separate Eagle from AMR.
 
Trading Market and Symbol: We intend to file an application to list shares of our common stock on the [•] under the symbol “[•].” We anticipate that trading of shares of Eagle common stock will begin on a “when-issued” basis prior to the distribution and will continue through the distribution date, and we expect “regular-way” trading of our common stock will begin the first trading day after the distribution date. We also anticipate that AMR common stock will continue to trade in the “regular-way” market on which shares of AMR common stock will trade with an entitlement to shares of Eagle common stock to be distributed pursuant to the distribution, and an “ex-distribution” market may develop prior to the distribution on which shares of


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AMR common stock would trade without an entitlement to shares of Eagle common stock. If you plan to sell your shares of AMR common stock prior to the distribution date, you should consult with your stockbroker, bank or other nominee and discuss whether you want to sell your AMR common stock or the Eagle common stock you will receive in the distribution, or both.
 
See “The Spin-Off — Trading Prior to the Distribution Date” for more information.
 
Tax Consequences to AMR Stockholders: AMR stockholders are not expected to recognize any gain or loss for U.S. Federal income tax purposes as a result of the distribution, except to the extent of any cash received by AMR stockholders in respect of fractional shares. See “The Spin-Off — Material U.S. Federal Income Tax Consequences of the Distribution” for a more detailed description of the U.S. Federal income tax consequences of the distribution.
 
Each stockholder is urged to consult his, her or its tax advisor as to the specific tax consequences of the distribution to that stockholder, including the effect of any U.S. Federal, state, local or foreign tax laws and of changes in applicable tax laws.
 
Relationship with AMR after the Spin-Off: Prior to the spin-off, we will enter into a Separation and Distribution Agreement and other agreements with AMR and American. These agreements will govern the relationship between Eagle and AMR and its affiliates up to and subsequent to the completion of the separation, provide for the transfer, assignment or reallocation of assets and past and future liabilities and obligations between Eagle and AMR and its affiliates, and set forth the terms and conditions for the business and services conducted between Eagle and our affiliates, on the one hand, and AMR and its affiliates, on the other hand, following the spin-off. We will enter into a Transition Services Agreement (the “Transition Services Agreement”) and an Information Technology Transition Services Agreement (the “Information Technology Transition Services Agreement”) with American pursuant to which American will provide us with certain services on an interim basis following the spin-off in exchange for specified fees for each service. We will also enter into a nine-year Air Services Agreement with American pursuant to which we will operate regional aircraft on behalf of American, an eight-year Ground Handling Agreement with American pursuant to which we will provide American with ground handling services and a 16-year Master Facilities Agreement (the “Facilities Agreement”) with American pursuant to which we will have a license to use certain of American’s airport and terminal facilities. Further, we will enter into an agreement with AMR regarding the sharing of taxes incurred before and after the spin-off, certain indemnification rights with respect to tax matters and certain restrictions on us to preserve the tax-free structure of the distribution. These agreements to be entered into between AMR or American and us in connection with the spin-off are collectively referred to in this Information Statement as the “Spin-Off Agreements” and, individually, a “Spin-Off Agreement.” We describe these arrangements in greater detail under


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“Agreements with AMR and Its Affiliates,” and describe some of the risks of these arrangements under “Risk Factors.”
 
Dividend Policy: We intend to retain future earnings for use in the operation of our business to fund future growth. We do not anticipate paying any dividends for the foreseeable future. See “Dividend Policy.”
 
Transfer Agent: We have not yet determined who the transfer agent for our common stock will be, but we expect to do so prior to the distribution and we will provide further information in an amendment to this Information Statement.
 
Risk Factors: Our business is subject to both general and specific risks and uncertainties. Our business is also subject to risks relating to the spin-off. Following the spin-off, we will also be subject to risks relating to being an independent, publicly-traded company. For more information on these risks, you should read carefully the information set forth under “Risk Factors.”


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Summary Historical and Pro Forma Consolidated Financial Data
 
The following tables present our summary historical and pro forma financial data. The summary historical consolidated financial data as of December 31, 2010 and 2009 and for each of the years in the three-year period ended December 31, 2010, are derived from our historical audited consolidated financial statements included elsewhere in this Information Statement. The summary historical consolidated financial data as of June 30, 2011 and for the six months ended June 30, 2010 and 2011, are derived from our historical unaudited financial statements included elsewhere in this Information Statement. We derived the unaudited pro forma consolidated financial data from our unaudited pro forma consolidated financial information included elsewhere in this Information Statement.
 
The unaudited pro forma consolidated statement of income data include certain adjustments to give effect to the reorganization (including transfers of certain assets and liabilities), the spin-off and the agreements related to the spin-off as if they occurred on January 1, 2010. The unaudited pro forma consolidated balance sheet data include certain adjustments to give effect to the reorganization (including transfers of certain assets and liabilities), the spin-off and the agreements related to the spin-off as if they occurred on June 30, 2011. We describe these adjustments in greater detail under “Unaudited Pro Forma Consolidated Financial Information.” We present the unaudited pro forma consolidated financial data for informational purposes only. They do not purport to represent what our financial position or results of operations would actually have been had the pro forma adjustments in fact occurred on the assumed dates or to project our financial position at any future date or results of operations for any future period.
 
The summary historical and pro forma financial data presented below should be read in conjunction with our consolidated financial statements and accompanying notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Information Statement. For each of the periods presented, we were a subsidiary of AMR. Prior to the spin-off, we will enter into the Air Services Agreement and the Ground Handling Agreement with American. We believe these agreements will reflect current market rates, and they will provide us with substantially all of our revenue immediately after the spin-off.
 
The financial information included herein may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly-traded company or had the Air Services Agreement and Ground Handling Agreement been in effect during the periods presented. In addition, our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from AMR, including changes in the financing, operations, cost structure and personnel needs of our business. Further, the historical financial information includes allocations of certain AMR corporate expenses.
 
We believe the assumptions and methodologies underlying the allocation of general corporate expenses are reasonable. However, such expenses may not be indicative of the actual level of expenses that would have been incurred by us if we had operated as an independent, publicly-traded company or of the level of expenses to be incurred in the future.
 


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                                        Pro Forma
 
                                  Pro Forma
    Six Months
 
                      Six Months Ended
    Year Ended
    Ended
 
    Year Ended December 31,     June 30,     December 31,
    June 30,
 
    2008(1)(2)     2009(1)(2)     2010     2010     2011     2010     2011  
                      (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
($ in thousands, except per share amounts)  
 
Statement of Income Data
                                               
Regional air services revenue
  $ 2,243,368     $ 1,808,207     $ 1,938,067     $ 934,012     $ 1,126,728     $ 979,067     $ 518,228  
Ground handling services revenue
    306,536       309,081       327,914       162,329       165,000       261,014       131,600  
Total operating expenses
    2,410,257       1,954,665       2,096,572       1,026,159       1,223,852       1,198,343       644,896  
Operating income
    139,647       162,623       169,409       70,182       67,876       41,738       4,932  
Other income (expense)
    (108,858 )     (106,443 )     (98,153 )     (49,252 )     (50,820 )     1,326       920  
Net income
  $ 20,801     $ 40,296     $ 40,902     $ 12,129     $ 9,911     $ 24,719     $ 3,394  
Basic and diluted earnings per share
                                  [•]       [•]  
Shares used in computing basic and diluted earnings per share
                                  [•]       [•]  
 
                                         
                            Pro Forma
 
    December 31,     June 30,
    June 30,
 
    2008     2009     2010     2011     2011  
    (Unaudited)                 (Unaudited)     (Unaudited)  
($ in thousands)  
 
Balance Sheet Data
                                       
Total assets
  $ 3,492,023     $ 2,716,416     $ 2,916,437     $ 3,002,435     $ 461,255  
Long-term debt, less current maturities
    1,924,095       1,741,124       1,848,975       1,909,474        
Total stockholder’s equity
    918,320       310,348       355,263       366,403       324,135  
 
                                                 
                        Pro Forma
                Six Months Ended
  Six Months Ended
    Year Ended December 31,   June 30,   June 30,
    2008   2009   2010   2010   2011   2011
($ in thousands)
(Unaudited)
 
Other Financial Data
                                               
EBITDA(3)
  $ 339,611     $ 317,099     $ 324,004     $ 144,640     $ 153,152     $ 14,723  
EBITDAR(3)
    348,026       346,666       353,026       159,088       167,795       14,723  
 
                                         
        Six Months Ended
    Year Ended December 31,   June 30,
    2008   2009   2010   2010   2011
 
Regional Flight Operating Statistics
                                       
Available seat miles (in thousands)(4)
    11,291,845       10,757,250       11,751,336       5,517,523       6,386,843  
Block hours(5)
    855,654       779,746       825,255       397,818       435,190  
Flight hours
    637,622       586,188       628,203       300,483       332,394  
Aircraft departures
    573,716       534,327       538,066       265,491       267,449  
Aircraft days
    102,674       94,651       96,553       46,882       50,910  
Average aircraft trip length (miles)
    396       395       431       411       437  
Ground Handling Operating Statistics
                                       
Handled departures
    565,934       557,260       578,322       286,393       293,039  
 
 
(1) For the years ended December 31, 2008 and 2009, we recorded special charges of $115.3 million and $42.2 million, respectively, primarily related to aircraft impairment and employee related severance charges, as more fully described in Note 3 to our consolidated financial statements. The aircraft related impairment charges were reimbursed as regional air services revenue under our agreement with American.
 
(2) For the year ended December 31, 2009, certain pass-through costs were classified differently than the year ended December 31, 2008. Passenger handling costs totaling $25.1 million were considered pass through or controllable in 2008, and such costs were absorbed by American for the year ended December 31, 2009. Portfolio interest totaling

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$13.0 million earned on our Funds due from AMR affiliates in 2008 reduced our regional air services revenue paid by American. In 2009, interest income earned did not impact operating revenues.
 
(3) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDAR is earnings before interest expense, income taxes, depreciation, amortization and aircraft rent. EBITDA and EBITDAR are not calculations based on generally accepted accounting principles and should not be considered as alternatives to net income or operating income as indicators of our financial performance or to cash flow as a measure of liquidity. In addition, our calculations may not be comparable to other similarly titled measures of other companies. EBITDA and EBITDAR are included as supplemental disclosures because they may provide useful information regarding our ability to service debt and lease payments and to fund capital expenditures. Our ability to service debt and lease payments and to fund capital expenditures in the future, however, may be affected by other operating or legal requirements or uncertainties. In addition, EBITDA and EBITDAR are well recognized performance measurements in the regional airline industry and, consequently, we have provided this information.
 
The following represents a reconciliation of EBITDA and EBITDAR to net income for the periods indicated ($ in thousands):
 
                                                 
                                  Pro Forma
 
                                  Six Months
 
                                  Ended
 
    Year Ended December 31,     Six Months Ended June 30,     June 30,
 
    2008     2009     2010     2010     2011     2011  
 
(Unaudited)
                                               
Net income
  $ 20,801     $ 40,296     $ 40,902     $ 12,129     $ 9,911     $ 3,394  
Interest expense
    124,778       111,230       99,497       49,396       51,625        
Income taxes
    9,988       15,884       30,354       8,801       7,145       2,458  
Depreciation and amortization
    184,044       149,689       153,251       74,314       84,471       8,871  
                                                 
EBITDA
  $ 339,611     $ 317,099     $ 324,004     $ 144,640     $ 153,152       14,723  
Flight equipment rentals
    8,415       29,567       29,022       14,448       14,643        
                                                 
EBITDAR
  $ 348,026     $ 346,666     $ 353,026     $ 159,088     $ 167,795     $ 14,723  
 
 
(4) Available seat miles are the number of passenger seats available multiplied by the number of scheduled miles those seats are flown.
 
(5) Block hours are the aggregate hours from gate departure to gate arrival for our fleet.


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RISK FACTORS
 
The risks and uncertainties described below are those we consider material and of which we are currently aware. If any of the following events occur, our business, financial condition or results of operations could be materially and adversely affected and the trading price of our common stock could materially decline. In addition, we may not be able to implement our business strategies.
 
In addition, this Information Statement contains forward-looking statements that involve risks and uncertainties. You should carefully read the section “Cautionary Statement Concerning Forward-Looking Statements.”
 
Risks Relating to Our Business
 
Our revenues are highly dependent on two contracts with American.
 
We are a subsidiary of AMR and derive all of our regional flight operations revenue and the substantial majority of our ground handling services revenue from American. Following the spin-off, we will initially still be dependent on American for substantially all of our revenue. If we do not receive payments owed to us under the Air Services Agreement or the Ground Handling Agreement in accordance with the payment terms, we may not be able to pay our operating expenses or obtain other sources of liquidity. Additionally, following the spin-off, if either the Air Services Agreement or the Ground Handling Agreement is terminated, we could lose all or a significant source of our revenue, cash flow and earnings. Furthermore, since the Air Services Agreement and Ground Handling Agreement have cross-termination rights, a breach or default by us under one agreement could result in a termination of both agreements.
 
Following the spin-off, the term of the Air Services Agreement will be nine years, subject to American’s option to withdraw certain aircraft at various intervals prior to the expiration date. There can be no assurance that American will renew this agreement when it expires or that it will not exercise its withdrawal rights. American may terminate the Air Services Agreement upon the occurrence of certain events, such as (i) our breach of a material non-monetary covenant, or a covenant that would reasonably be expected to deprive American of the benefits of the agreement, that continues uncured for 60 days; (ii) our failure to pay amounts owing to American under the terms of the agreement, or our breach of a monetary provision of the agreement, that remains uncured for 10 days; (iii) our FAA or Department of Transportation (“DOT”) certification being suspended or revoked; (iv) a change of control of our company; (v) a change in the manner in which we conduct business after the distribution date, and such change causes American to be in violation or breach of any collective bargaining agreement binding on American, which term was in effect as of the distribution date; (vi) our failure to operate a designated percentage of scheduled flights over certain time periods; (vii) the occurrence of a force majeure event that continues for more than 14 consecutive days; (viii) the occurrence of a default by us under any of our ancillary agreements with American (including the Ground Handling Agreement or the Facilities Agreement); or (ix) the termination of two or more of the aircraft leases between us and American, due to a default under those leases.
 
The term of the Ground Handling Agreement is eight years, subject to American’s right to withdraw our ground handling services at certain airports at various intervals during the term. There can be no assurance that American will renew this agreement when it expires or that it will not exercise its withdrawal rights. American may terminate the Ground Handling Agreement upon the occurrence of certain events, such as (i) our breach of a material non-monetary covenant, or a covenant that would reasonably be expected to deprive American of the benefits of the agreement, that continues uncured for 60 days; (ii) our failure to pay amounts owing to American under the terms of the agreement, or our breach of a monetary provision of the agreement, that remains uncured for 10 days; (iii) the occurrence of a force majeure event that continues for more than 14 consecutive days; (iv) the termination or expiration of the Air Services Agreement; (v) a change of control of our company; (vi) the termination by American of ground handling services at two hub airports or ten non-hub airports pursuant to certain specified termination rights; (vii) a change in the manner in which we conduct business after the distribution date, and such change causes American to be in violation or breach of any collective bargaining agreement binding on American, which term was in effect as of the distribution date; or (viii) our transfer of all or substantially all of the assets that are used to perform ground handling


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services to American, other than transfers to an affiliate or in connection with a sale/leaseback transaction or capital raising activity.
 
In light of the importance of these two agreements with American to our business, the termination of either of these agreements, a reduction of American’s business with us or reduced utilization levels of our business could jeopardize our operations, which would likely have a material adverse effect on our business, financial condition or results of operations. See “— American may reduce its business with us, and we may not be able to replace that business” and “— Reduced utilization levels of aircraft by American under the Air Services Agreement or of ground handling services under the Ground Handling Agreement would reduce our revenues and earnings.”
 
We may be negatively impacted by the financial condition of American.
 
Currently, all of our regional flight operations revenue and the substantial majority of our ground handling services revenue are derived from American and, following the spin-off, we will initially continue to be dependent on American for substantially all of our revenue. In addition, in connection with the spin-off, we expect American to provide us with a revolving credit facility. American has incurred significant losses in recent years, which has weakened its financial condition. American’s business and financial performance are subject to a number of risks, including (i) weak demand for air travel and lower investment asset returns; (ii) significant amounts of indebtedness, including significant pension funding obligations; (iii) increases in fuel prices or disruptions in the supply of fuel; (iv) competition in the airline industry; (v) labor costs that are higher than its primary competitors; and (vi) disruptions by employee work groups (e.g., sick-out, slowdown, full or partial strike, or other job action). Any of these risks could negatively impact our ability to receive payments under our agreements with American or to borrow funds from American.
 
Given these risks, there can be no assurance that American will continue to perform under our agreements or be able to provide loans to us. Bankruptcies in the commercial airline industry are not uncommon, and American could file for bankruptcy, in which case our agreements could be subject to termination or renegotiation under the U.S. Bankruptcy Code. Although the agreements are part of one single transaction and related, in any bankruptcy filing by American, it is possible that American could opt, and a bankruptcy court could allow American, to continue under some of our agreements with it and not others. In such event, we could be forced to continue to perform under certain of the agreements without receiving the benefits of the other agreements. Regardless of whether bankruptcy filings prove to be necessary, American may seek to reduce costs, including reducing amounts to be paid to us, to improve its financial position. Additionally, because the Super ATR turbo-prop aircraft are subleased to us under leases American has with third parties, if American files for bankruptcy, we could be forced to continue to pay lease payments on these aircraft, even if American has opted not to continue with our other agreements.
 
Additionally, all of our aircraft and certain of our facilities are either leased by American from third parties or are security for debt owed by American. If American were to default on these leases or debt, we could lose our right to continue operating the aircraft or using the facilities, or we may have to do so on less favorable terms. If these events occur, our ability to retain aircraft and obtain necessary facilities may depend on negotiations between us and third parties.
 
Furthermore, AMR and American will indemnify us for certain liabilities that relate to certain actions that we have taken and certain failures to act by us prior to the distribution or, in certain circumstances, in connection with our providing regional flight operations and ground handling services to American following the spin-off. We will be dependent on AMR and American to pay for any such liabilities, and any failure to pay could have a material adverse effect on our business, financial condition or results of operations.
 
We believe that any of these developments could have a material adverse effect on our business, financial condition or results of operations.
 
American may reduce its business with us.
 
Beginning on January 1, 2014, American will have the right to withdraw a specified number of up to 40 jet aircraft in each year from the terms of the Air Services Agreement, provided that we have received at least


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12 months prior notice of the withdrawal. Beginning on January 1, 2012, American will also have the right to withdraw up to 12 Super ATR turbo-prop aircraft from the terms of the Air Services Agreement in each year. American’s right to withdraw aircraft each year is cumulative so that any number of aircraft not withdrawn in any year may be withdrawn in a subsequent year, subject to certain limitations. American will also have certain additional rights to withdraw aircraft under the Air Services Agreement upon certain events, such as if (i) we do not agree to provide at least the same number of block hours on a final monthly schedule as are set forth on any associated requested plan for three consecutive months; (ii) the aircraft is no longer subject to an aircraft lease with American due to our default or there is an event of loss with respect to such aircraft, but only if such event of loss or any termination of lease was not caused by the gross negligence or willful misconduct of American or an American agent; (iii) we fail to maintain a specified controllable completion rate over certain designated time periods; or (iv) we exceed certain preset fuel consumption baselines over certain designated time periods. See “Agreements with AMR and Its Affiliates — Air Services Agreement — Withdrawal of Aircraft.”
 
Additionally, beginning on the third anniversary of the Ground Handling Agreement, American will have the right to withdraw ground handling services at a specified number of hub airports and a specified number of non-hub airports each year in accordance with a specified schedule. The total number of non-hub airports subject to early withdrawal at each interval is based on a specified percentage of total departures at those airports. The total number of airports subject to early withdrawal each year is in addition to the number of eligible airports that were not withdrawn in prior years. American will also have additional rights to terminate ground handling services at specific airports upon the occurrence of certain events. See “Agreements with AMR and Its Affiliates — Ground Handling Agreement — Term and Termination” and “Agreements with AMR and Its Affiliates — Ground Handling Agreement — Withdrawal of Services.” If our ground handling services are withdrawn or terminated in full or in part, our business, financial condition or results of operations could be materially and adversely affected.
 
We believe that any of these developments could have a material adverse effect on our business, financial condition or results of operations.
 
Our labor costs are higher than those of our competitors and may increase if our aggregate flying is reduced.
 
For the six months ended June 30, 2011, wages, salaries and benefits constituted approximately 50% of our pro forma operating expenses. We believe our labor costs are higher than those of most other regional airlines, primarily due to the higher average level of seniority of our employees that are represented by collective bargaining groups. If our aggregate flying is reduced, our labor costs as a percentage of our total operating costs would likely substantially increase. This could impede our ability to compete, prevent us from retaining our current customers and make us unable to implement our business strategies. Further, while we are focused on addressing our higher labor costs, we cannot predict the outcome of our ongoing discussions with the leadership of our collective bargaining groups and we may not be successful in reducing our labor costs. Failing to reduce our labor costs could impede our ability to compete, prevent us from retaining our current customers or make us unable to implement our business strategies.
 
Reduced utilization levels of aircraft by American under the Air Services Agreement or of ground handling services under the Ground Handling Agreement would reduce our revenues.
 
Following the spin-off, most of our regional flight operations revenue from American under the Air Services Agreement will be derived from pre-set rates and reimbursable expenses that we incur when we fly aircraft for American. As a result, if American reduces the utilization of these aircraft, our revenues would decrease and our results could deteriorate. American is solely responsible for scheduling our flights and could decide to reduce significantly the utilization levels of these aircraft in the future, subject to payment of certain amounts based on minimum utilization. Rising fuel prices and other factors affecting American’s business, or a decline in the financial or operational performance of American, could lead to a reduction in American’s utilization of these aircraft. See “— We may be negatively impacted by the financial condition of American.”


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Under the Ground Handling Agreement, we will be compensated by American according to pre-set rates on an airport-by-airport basis based on the actual arrival and subsequent departure of an aircraft and we will also be reimbursed for certain expenses. American will be in control of the number of arrivals and departures. We will be permitted to request an increase to our pre-set rates if any change in scheduled flights materially increases our aggregate costs per departure, and American will be permitted to request a decrease in our pre-set rates if such change materially decreases our aggregate costs per departure. However, there can be no assurance that any increase in pre-set rates will occur or would offset our increased costs or reduced revenues, and we may be subject to decreases with which we may not agree.
 
Reduced aircraft utilization levels and changes in pre-set ground handling rates under our agreements with American could reduce our revenue and earnings, which could materially adversely affect our business, financial condition or results of operation.
 
American will be permitted to pay us reduced rates under the Air Services Agreement upon the occurrence of certain events.
 
Under the Air Services Agreement, we will be compensated by American in accordance with established pre-set rates, which will be subject to certain adjustments and reset rights. In addition, under the Air Services Agreement, we will be required to offer American the opportunity to enter into a new agreement with respect to additional airline services on substantially the same economic terms as any agreement we enter into with a third party at any station for regional flight operations using aircraft with more than 86 seats. Furthermore, if we enter into a proposed agreement with a third party for regional flight operations using aircraft with more than 60 but fewer than 86 seats, we must notify American of the material terms of the proposed agreement and American may reduce our rates related to CRJ jet aircraft to match the rates in the proposed agreement. Any such reduction of rates or any reset or adjustment that results in a reduction of rates could decrease our revenue, which could have a material adverse effect on our business, financial condition or results of operations.
 
We may experience difficulty finding, training and retaining employees, particularly pilots, which may interfere with our ability to meet our obligations under our agreements and interfere with our ability to implement our business strategies.
 
Our business is labor intensive. We require large numbers of pilots, flight attendants, mechanics and other personnel. If we are unable to hire and retain qualified employees at a reasonable cost, we may be unable to meet our obligations to American under our agreements or to implement our growth strategy, which could materially adversely affect our business, financial condition or results of operations.
 
In addition, the Airline Safety and Pilot Training Improvement Act of 2009 became effective in August 2010. The act adds new certification requirements for entry-level commercial pilots, requires additional emergency training and mandates stricter rules to minimize pilot fatigue. This new law also requires that all airline pilots complete a minimum of 1,500 flight hours to obtain an Airline Transport Pilot license, which was formerly only required for captains. Furthermore, the FAA has issued a Notice of Proposed Rulemaking applicable to Part 121 carriers, that include American, American Eagle and Executive, to change the required amount and timing of rest periods for pilots between work assignments, modifying duty and rest requirements based on the time of day, number of scheduled segments, flight types, time zones and other factors. The industry is seeking clarification from the FAA of certain provisions of the proposed rule. If the proposed rule is not amended, these requirements could have a negative effect on our ability to employ new pilots and on the scheduling of our pilots. These requirements could also increase competition for pilots within the airline industry. Such increased competition may disproportionately affect regional carriers, given the higher salaries paid by mainline carriers. Further, pursuant to an agreement with American, our current pilots have the option to transfer to American as positions with American become available. Failure to hire and retain pilots could materially adversely affect our business, financial condition or results of operations and limit our ability to implement our business strategies.


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Our operations may result in losses, particularly if our future costs are higher or our revenues are lower than expected, and our agreements with customers could limit our ability to benefit from improved market conditions or increased operational efficiency.
 
The payments we will receive from our customers for our regional flight operations and ground handling services are based on pre-set rates. Certain costs will be paid or reimbursed by our customers, such as fuel costs, but we will not be reimbursed for many substantial costs, such as overhead, labor costs, costs of repairs on our equipment and most aircraft maintenance costs. As a result, our operating margin could be negatively impacted if our actual costs that are intended to be covered by the pre-set rates are higher than the expected costs that were used to establish these rates or if our non-reimbursed costs exceed our estimates for these costs. Our operating margin could also be negatively impacted by reduced utilization of our aircraft, withdrawal of our aircraft or reductions of the rates we are paid under our agreements, which could result in insufficient cash flow to pay our costs. Further, although our agreements with American will be subject to certain adjustments, the adjusted rates may not be sufficient to offset our costs and expenses. While the pre-set rates in our agreements and the ability to pass through certain costs to our customers reduce our financial risk and exposure to fluctuations, our agreements also limit our potential to experience higher earnings growth from improved market conditions or increased operational efficiency.
 
In addition, following the spin-off, we will not own the aircraft that we will operate for American, but we will continue to be responsible for certain maintenance costs relating to the aircraft. As our fleet of aircraft ages, the cost of maintaining the aircraft will likely increase. Because many aircraft components are required to be replaced after specified numbers of flight hours or take-off and landing cycles, and because new aviation technology may be required to be retrofitted, the cost to maintain aging aircraft will generally exceed the cost to maintain newer aircraft. If we are unable to pass along increased maintenance costs, any material increase in maintenance costs could have a material adverse effect on our business, financial condition or results of operations.
 
Following the spin-off, all of the aircraft we operate for American will be leased or subleased by us from American. In order to expand our regional flight operations, we may be required to acquire or lease additional aircraft.
 
Following the spin-off, all of the aircraft we operate for American will be leased or subleased by us from American. The terms of our agreements with American do not permit us to operate these aircraft for another carrier without the prior consent of American. In order to expand our business, we will initially seek to enter into capacity purchase contracts where we would lease aircraft from the mainline carrier and would not be required to obtain our own aircraft. However, we may be required to source the aircraft ourselves or enter into pro-rate contracts in the future in order to compete for business. We may not be able to provide regional flight operations to other carriers and our ability to pursue growth opportunities could be severely limited if we are required to obtain aircraft and are unable to obtain financing. In addition, if we are required to acquire aircraft, then we will become subject to the risks associated with aircraft ownership, and if we are required to enter into pro-rate contracts, we will become subject to additional costs and revenue risks that we currently do not have, such as the purchase of fuel and rising fuel prices.
 
We may not be able to access additional financing sources on favorable terms, or at all, which could adversely affect our ability to operate our business as planned and limit our ability to expand our business.
 
We are being initially capitalized by a cash contribution from AMR currently contemplated to be approximately $50 million and, in connection with the spin-off, we expect American to provide us with a revolving credit facility. We have no other established financing sources and have no credit history on a stand-alone basis. Our ability to operate our business as currently planned and to expand our business may require additional sources of capital and liquidity in the future. Since American will own our regional aircraft fleet and license certain facilities to us, we will have limited fixed assets following the spin-off that we could use as security for any future borrowings from other sources.


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If we are not able to access additional capital on reasonable terms or are unable to provide collateral to obtain the financing we seek, we may not be able to grow our business or implement our strategy. Further, our ability to obtain additional capital depends on conditions in the capital and credit markets, which are beyond our control. In recent years, the U.S. capital and credit markets have experienced extreme volatility and disruption, which may make it difficult or impossible to obtain the financing we need to operate our business and implement our growth plans. We cannot make any assurances that the capital and credit markets will provide an acceptable source of long-term financing. If we require additional sources of financing and are not able to raise additional capital or borrow additional funds on terms acceptable to us, we may not be able to grow our business as planned, which could have a material adverse effect on our business, financial condition or results of operations and limit our ability to implement our business strategies.
 
Our business could be harmed if we lose the services of our key personnel.
 
Our business depends on the efforts of our chief executive officer, Daniel P. Garton, and our other key management and operating personnel. We may have difficulty replacing management or other key personnel who leave and, therefore, the loss of the services of any of these individuals could harm our business.
 
We may be unable to obtain all of the engines, parts or related maintenance and support services we require from our suppliers, which could have a material adverse impact on our business.
 
We are dependent on certain suppliers for our engines, parts and related maintenance and support services. Any significant disruption or delay in the expected delivery schedule of parts or materials for our regional aircraft or ground handling equipment would affect our overall operations and could have a material adverse effect on our business, financial condition or results of operations.
 
If we do not compete effectively with other ground handling service providers, we could lose customers.
 
The ground services business is highly competitive, and ground handling service contracts can typically be terminated with 60 to 90 days notice. Service quality and price are particularly important competitive factors in the ground handling industry. In addition, some airlines that use third party ground handling service providers could decide to perform these services themselves. Although we believe that trends and projections in our industry are favorable for third party providers of ground services including Eagle, this may not prove to be the case as a result of factors outside of our control such as changes in economic conditions or a change in outsourcing strategies by airlines. In addition, some of our competitors have significant financial and other resources. If we do not compete effectively with other service providers, we could lose customers, which could have a material adverse affect on our business, financial condition or results of operation.
 
Our ground handling operations could be materially adversely affected if airports terminate our operating rights.
 
In order to provide ground handling services at an airport, we usually must have authorization from the local airport operator. This authorization generally can be terminated by the local airport operator at will and without cause. The loss of one or more of these authorizations to operate could affect our ability to operate ground handling services at these airports, which could materially adversely affect our business, financial condition or results of operations and our ability to implement our business strategies.
 
Strikes or labor disputes with our employees may adversely affect our ability to conduct our business and could result in the termination of the Air Services Agreement or Ground Handling Agreement or in significant reductions in the benefits of the agreements to us.
 
All of our pilots, flight attendants, dispatchers, fleet service clerks and a majority of our mechanics are represented by collective bargaining groups. Collectively, these employees represented approximately 60% of our workforce at July 1, 2011. Our collective bargaining agreement with our pilots becomes amendable in January 2013, our collective bargaining agreement with our mechanics becomes amendable in April 2012 and our collective bargaining agreement with ground school instructors becomes amendable in April 2012. Our


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collective bargaining agreements with our flight attendants, dispatchers, fleet service clerks and Canadian ramp agents and mechanics are currently amendable. If we are unable to reach agreement with any of our collective bargaining groups on the terms of their collective bargaining agreements upon their initial and amendable dates, we may be subject to work interruptions, stoppages or a fleet size reduction.
 
Any disruption by an employee work group (e.g., sick-out, slowdown, full or partial strike, or other job action) may adversely affect our ability to conduct our operations and fulfill our obligations under the Air Services Agreement or Ground Handling Agreement and impair our financial performance. Under the agreements, adverse consequences could result to us from a strike or a work stoppage or disruption, including possible termination of the Air Services Agreement and Ground Handling Agreement by American.
 
Our heavy reliance on technology and the technology of our operating partners could be harmful in the event of system failure.
 
We rely heavily on automated systems and technology to operate our business, including flight operations and telecommunications. American will provide us with certain information technology services, subject to some exceptions, only for a limited period of time pursuant to the Information Technology Transition Services Agreement with American. Any disruptions in these systems or the systems of our operating partners due to internal failures of technology or external interruptions, such as power outages, could result in the loss of critical data and/or cancellation of flights and have a material adverse effect on our business, financial condition or results of operations.
 
Further, in order to conduct our business independently of American and to expand our operations, we will need to establish our own infrastructure, including the systems, facilities and services to support our operations. We may be unable to implement successfully the changes necessary to operate independently, and we may incur significant costs that could materially adversely affect our business, financial condition and results of operations.
 
Increases in insurance costs or reductions in coverage could have an adverse impact on our business, financial condition or results of operations.
 
We carry insurance policies of the types customary in the airline industry and with limits we believe are adequate to protect us against material loss. American has agreed to place our insurance in conjunction with American’s insurance portfolio through July 1, 2012, in exchange for a service fee and may continue to do so after that date. To the extent American does not continue to place our insurance, we may have to pay additional costs and may need to obtain additional staffing and expertise. In addition, commercial insurers could increase their premiums or reduce the amount or types of insurance coverage available, which could have an adverse impact on our business, financial condition or results of operations. Although American will pay directly or reimburse us for the cost of certain of this insurance during the term of the Air Services Agreement and Ground Handling Agreement, we will be responsible for insurance not covered by these agreements (including directors’ and officers’ liability insurance) and for any additional premium charges that may need to be paid if we commence regional flight operations for other airlines or if our actions are the cause of any such premium increase.
 
The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines through September 30, 2011, covering losses to employees, passengers, third parties and aircraft. If the U.S. government were to cease providing such insurance in whole or in part, it is likely that we could obtain comparable coverage in the commercial market, but we could incur substantially higher premiums and more restrictive terms, if such coverage is available at all. If we are unable to obtain adequate war-risk coverage at commercially reasonable rates, our business, financial condition or results of operations could be adversely impacted.


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The costs of compliance with environmental laws and regulations may adversely affect our income and cash available for operations.
 
Under the Facilities Agreement, we must comply with all applicable legal requirements regarding hazardous materials and environmental conditions at the airport facilities licensed to us by American. Some of these laws and regulations impose joint and several liability on owners or operators for the costs of investigation or remediation of contaminated properties regardless of fault or the legality of the original disposal. In addition, the presence of any hazardous materials, or the failure to properly remediate these substances, may result in liability to us. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. We cannot assure you that future laws, ordinances or regulations will not impose material environmental liability, or that the current environmental condition of the applicable airport facilities will not be affected by the operations or activities of unrelated third parties. Failure to comply with applicable laws and regulations could result in fines and/or damages, suspension of personnel or other sanctions and could have a material adverse effect on our business, financial condition or results of operations.
 
Risks Relating to the Regional Airline Industry
 
Increased competition in the regional airline industry or additional consolidations in the airline industry could affect our ability to implement our business strategies.
 
Our ability to provide regional flight operations to airlines other than American will be limited by existing relationships that the mainline carriers have with other regional operators. In addition, new competitors may enter the regional airline industry and our existing competitors may expand their regional airline operations, thus impacting our growth prospects. Capacity growth by our competitors could lead to significantly greater competition and may result in lower rates of return in our industry. Further, many of the mainline carriers are focused on reducing costs, which may also result in lower operating margins in our industry.
 
In addition to traditional competition among airlines, the industry faces competition from ground transportation alternatives. Video teleconferencing and other methods of electronic communication have also added a new dimension of competition to the industry as businesses and travelers seek substitutes for air travel.
 
The airline industry has undergone substantial consolidation, and it may in the future undergo additional consolidation. Other developments include domestic and international codeshare alliances between mainline carriers. Any additional consolidation or significant alliance activity within the airline industry could limit the number of potential partners for whom we provide regional flight operations and limit our ability to implement our business strategies.
 
Certain mainline carriers may be restricted in conducting business with us, thereby limiting our ability to implement our business strategies.
 
The pilots’ unions of certain mainline carriers have negotiated collective bargaining agreements that restrict the number and/or size of regional aircraft that a particular carrier may operate. In addition, these scope clauses could become more restrictive in the future. Current scope clause restrictions and any additional limits on the number or types of regional jets we can fly for our potential codeshare partners could have a material adverse effect on our growth prospects and our ability to implement our business strategies.
 
The regional airline business is affected by many conditions beyond our control.
 
Demand for regional flight operations is affected by many conditions beyond our control, including, among others:
 
  •  actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation, higher interest rates, wars, terrorist attacks or political instability;


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  •  changes in consumer preferences, perceptions, spending patterns or demographic trends;
 
  •  changes in the competitive environment due to industry consolidation, changes in airline alliance affiliations and other factors;
 
  •  actual or potential disruptions to the air traffic control systems;
 
  •  increases in costs of safety, security and environmental measures;
 
  •  disruptions in the supply of fuel or increases in the prices for fuel;
 
  •  conflicts overseas and terrorist attacks;
 
  •  outbreaks of diseases that affect travel; and
 
  •  weather and natural disasters.
 
In particular, there have been significant and steep increases in prices for fuel from time to time in recent years. Although the cost of fuel may be passed through to, or paid directly by, our customers, these increases may result in a decrease in flying by mainline carriers and reduced utilization of our regional flight operations. As a result, our business may be volatile and subject to rapid and unexpected change, which could have a material adverse effect on our business, financial condition or results of operations.
 
The regional airline business is subject to significant governmental regulation.
 
All interstate air carriers are subject to regulation by the DOT, the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel engaged in flight, maintenance or operation activities; record keeping procedures in accordance with FAA rules; and FAA approval of flight training and retraining programs. We cannot predict whether we will be able to comply with all present and future laws, rules, regulations and certification requirements. Costs of continued compliance could have a material adverse effect on our business, financial condition or results of operations. We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. A decision by the FAA to ground, or require time-consuming inspections of or maintenance on, all or any of our aircraft for any reason may have a material adverse effect on our business, financial condition or results of operations.
 
The occurrence of an aviation accident could have an adverse impact on our business, financial condition or results of operations.
 
An accident involving one of our aircraft could result in significant claims from injured passengers and others, as well as aircraft repair or replacement costs. In the event of an accident, our liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear substantial losses, which could adversely affect our business, financial condition or results of operations. In addition, any aircraft accident, even if fully insured, could result in a public perception that our operations are less safe or reliable than other airlines, which could adversely impact our business, financial condition or results of operations.
 
Risks Relating to the Spin-Off
 
Our agreements with AMR and American may not reflect terms that would have resulted from arm’s-length negotiating among unaffiliated third parties.
 
Our agreements with AMR and American were negotiated in the context of our separation from AMR while we were still part of AMR. The terms of the agreements we will enter into with American and AMR prior to or contemporaneously with the spin-off are related to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations among AMR or American and us. See “Agreements with AMR and Its Affiliates” for more detail. While we believe our agreements with American and AMR are on terms substantially similar to those that we would be able to obtain from an unrelated third party, these


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agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.
 
We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from AMR and American.
 
As an independent, publicly-traded company, we believe that our business will benefit from, among other things, allowing us to better focus our financial and operational resources on our specific business, allowing our management to design and implement corporate strategies and policies that are based primarily on the business characteristics and strategic decisions of our business, allowing us to more effectively respond to industry dynamics and allowing the creation of effective incentives for our management and employees that are more closely tied to our business performance. However, by separating from AMR and American, we may be more susceptible to market fluctuations and other adverse events than we would have been if we were we still a part of AMR. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all. For example, it is possible that investors and securities analysts will not place a greater value on our business as an independent company than on our business as a part of AMR.
 
Our historical and pro forma financial information is not necessarily representative of the results we would have achieved as an independent, publicly-traded company and may not be a reliable indicator of our future results.
 
The historical and pro forma financial information we have included herein may not reflect what our results of operations, financial position and cash flows would have been had we been an independent, publicly-traded company during the periods presented, or what our results of operations, financial position and cash flows will be in the future when we are an independent company. This is primarily because:
 
  •  our commercial relationship with AMR and American following the spin-off will be on different terms than the terms of our relationship prior to the spin-off;
 
  •  our historical and pro forma financial information reflects allocations for certain services historically provided to us by AMR that may not reflect the costs we will incur for similar services in the future as an independent company; and
 
  •  our historical and pro forma financial information does not reflect changes that we expect to experience in the future as a result of our separation from AMR, including changes in the cost structure, personnel needs, financing and operations of our business.
 
Following the spin-off, we also will be responsible for the additional costs associated with being an independent, publicly-traded company, including costs related to compliance with the Sarbanes-Oxley Act of 2002 (“SOX”), corporate governance matters and public reporting. Therefore, our financial statements may not be indicative of our future performance as an independent company. For additional information about our past financial performance and the basis of presentation of our financial statements, see “Selected Historical Financial Data,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto included elsewhere in this Information Statement.
 
If the distribution is determined to be taxable for U.S. Federal income tax purposes, our stockholders and AMR could incur significant U.S. Federal income tax liabilities.
 
The distribution is conditioned on the receipt by AMR, on or before the distribution date, of a private letter ruling from the IRS and an opinion from Baker Botts L.L.P., in each case, substantially to the effect that for U.S. Federal income tax purposes, the distribution (i) will qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, (ii) will not result in taxable gain or loss to AMR (apart from gain recognition on the transfer of aircraft and certain other assets from Eagle to American prior to the spin-off), and (iii) will not result in gain or loss to the stockholders of AMR, except to the extent of cash received in


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respect of fractional shares. AMR can waive receipt of either or both of the tax opinion or private letter ruling as a condition to the distribution. See “The Spin-Off — Material U.S. Federal Income Tax Consequences of the Distribution” for more detail.
 
Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations or assumptions made in the letter ruling request are inaccurate or incomplete in any material respect, we may not be able to rely on the ruling. Furthermore, the IRS will not rule on whether a distribution satisfies certain requirements necessary to obtain tax-free treatment under Section 355 of the Internal Revenue Code, including with respect to the business purpose for the spin-off (which is required to be a corporate, rather than a stockholder level, business purpose) and with respect to whether the spin-off is a device for the distribution of earnings and profits (which is a facts and circumstances analysis). Rather, the private letter ruling is based upon representations by AMR that a business purpose exists for the spin-off and that the spin-off is not a device for the distribution of earnings and profits. Any inaccuracy in such representations could invalidate the private letter ruling. Therefore, in addition to obtaining the ruling from the IRS, AMR has made it a condition to the distribution that AMR obtain the opinion of Baker Botts L.L.P., as described above. The opinion of Baker Botts L.L.P. will not be binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. The opinion will rely on the private letter ruling as to matters covered by the ruling. In addition, the opinion will be based on, among other things, various factual representations and assumptions made by AMR and us. If any of these factual representations or assumptions are incorrect or incomplete in any material respect, the opinion rendered by Baker Botts L.L.P. could be invalidated. Neither we nor AMR are aware of any facts or circumstances that would cause any of the factual statements or representations that we will be expected to make in connection with the private letter ruling or the legal opinion to be incomplete or untrue or cause the facts on which the ruling and opinion will be based to be materially different from the facts at the time of the distribution.
 
Notwithstanding receipt by AMR of the private letter ruling, the IRS could determine that the distribution should be treated as a taxable transaction if it determines that any of the representations, assumptions or undertakings that will be included in the request for the private letter ruling is false or has been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter ruling. If the IRS were to determine that the distribution does not qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, AMR would be subject to tax as if it had sold our common stock in a taxable sale for its fair market value. In addition, each AMR stockholder that received our shares in the distribution would generally be treated as if it had received a distribution to the extent of the fair market value of the shares received on the distribution date. The distribution would generally be treated as taxable dividend income to the extent of such holder’s pro rata share of the current and accumulated earnings and profits of AMR, if any. Any amount that exceeds such share of earnings and profits of AMR would be treated first as a reduction in the stockholder’s basis (but not below zero) in AMR common stock, and any remaining amounts would be treated as capital gain.
 
We are agreeing to certain restrictions on us to preserve the tax-free treatment of the distribution to AMR stockholders, which may reduce our strategic and operating flexibility following the distribution.
 
Even if the distribution otherwise qualifies as a tax-free transaction for U.S. Federal income tax purposes, the distribution will be taxable to AMR (but not to AMR stockholders) pursuant to Section 355(e) of the Internal Revenue Code if there are one or more acquisitions (including issuances) of the stock of either us or AMR, representing 50% or more, measured by vote or value, of the then-outstanding stock of either corporation and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Subject to certain exceptions, any acquisition of our common stock within two years before or after the distribution generally will be presumed to be part of such a plan unless we can rebut that presumption.
 
The covenants in, and our indemnity obligations under, the Tax Matters Agreement may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. Further, as the Tax Matters Agreement relates to Section 355(e) of the Internal Revenue Code specifically, these covenants and indemnity obligations might discourage or delay a change of control that you


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may consider favorable. Under the Tax Matters Agreement, during the two-year period following the distribution, we may not, subject to certain exceptions, enter into or authorize (a) any transaction (including a merger) resulting in the acquisition of our stock or assets beyond certain thresholds, (b) any issuance of equity securities beyond certain thresholds or (c) any redemptions or repurchases of our common stock, unless certain conditions are satisfied.
 
A potential indemnity liability to AMR if the distribution is treated as a taxable transaction could materially adversely affect our company.
 
Generally, taxes resulting from the distribution failing to qualify as a tax-free distribution for U.S. Federal income tax purposes would be imposed on AMR and its stockholders. Under the Tax Matters Agreement, however, we would be required to indemnify AMR and its affiliates against all taxes imposed on AMR as a result of such failure to the extent those taxes arise as a result of an action taken by us after the distribution or otherwise results from any breach of any representation, covenant or obligation of us or our affiliates under the Tax Matters Agreement or any other agreement entered into by us in connection with the spin-off. See “Agreements with AMR and Its Affiliates — Tax Matters Agreement.”
 
Our indemnification obligations to AMR and its affiliates are not limited by any maximum amount. If we are required to indemnify AMR or its affiliates under the circumstances set forth in the Tax Matters Agreement, our financial condition could be materially adversely affected.
 
A potential indemnity liability pursuant to our agreements with American could materially adversely affect our company.
 
We will have indemnity obligations pursuant to each of our agreements with American including with respect to certain actions we may take and certain failures to act in connection with the regional flight operations or ground handling services we provide. Our indemnification obligations to American are not limited by any maximum amount. If we are required to indemnify American under the circumstances set forth in the agreements, our financial condition could be materially adversely affected.
 
We may be unable to use net operating losses of the AMR consolidated group to offset future taxable income in taxable years beginning after the end of the year in which the distribution occurs.
 
In connection with the spin-off, AMR will allocate to us approximately $800 million of NOLs of the AMR consolidated group that are attributable to us. Our ability to use such NOLs against future taxable income could be limited if there is an ownership change (generally cumulative stock ownership changes exceeding 50% during a three-year period as determined under Section 382 of the Internal Revenue Code) with respect to (i) our common stock prior to or after the distribution or (ii) AMR common stock prior to the distribution.
 
To avoid a potential adverse effect on our ability to use the NOL carryover allocable to us for U.S. Federal income tax purposes, our amended and restated certificate of incorporation will contain a “5% Ownership Limitation,” which will prohibit certain transfers of our stock. The purpose of these transfer restrictions is to prevent a change of ownership from occurring within the meaning of Section 382 of the Internal Revenue Code (which ownership change would materially and adversely affect our ability to use the NOL carryover allocable to us from the AMR consolidated group). The 5% Ownership Limitation will be applicable to all stockholders except [•] and will remain in effect until the earlier to occur of (i) [•], 20[•], or such later date as may be approved by our board of directors, (ii) the repeal, amendment or modification of Section 382 of the Internal Revenue Code (and any comparable successor provision) in such a way as to render the restrictions imposed by Section 382 of the Internal Revenue Code no longer applicable to us, (iii) the beginning of our taxable year in which no available NOL carryovers remain, and (iv) the date on which the limitation amount imposed by Section 382 of the Internal Revenue Code would not be materially less than our remaining NOL carryovers. Even with the 5% Ownership Limitation, no assurance can be given that an ownership change will not occur, in which case the availability of our substantial NOL carryover and other U.S. Federal income tax attributes would be significantly limited.


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We will rely on certain services from American following the spin-off and may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company.
 
We have historically operated as part of AMR’s corporate organization. Following the spin-off, we intend to use certain of American’s systems, facilities and services to support some of our operations, including our information technology support, banking services, benefits and retirement services, employee services, medical/clinical services, payroll services, tax administration, certain legal services and training services. While American will continue to provide operational support services under the terms of the Air Services Agreement, American’s provision of other services will continue, subject to some exceptions, only for a limited period of time and will be governed by our Transition Services Agreement and Information Technology Transition Services Agreement with American. American will have the right to terminate the Information Technology Transition Services Agreement if both the Air Services Agreement and Ground Handling Agreement are terminated, and will have the right to terminate the Transition Services Agreement if the Air Services Agreement is terminated. In addition, if a default occurs under the Transition Services Agreement or Information Technology Transition Services Agreement, and such default gives American the right to terminate the Transition Services Agreement or Information Technology Transition Services Agreement, American will have the right to terminate the Air Services Agreement. For a description of these services and agreements, please read “Agreements with AMR and Its Affiliates.”
 
Further, in order to conduct our business independently of American and to expand our operations, we will need to establish our own infrastructure, including the systems, facilities and services to support our operations. We may be unable to successfully implement the changes necessary to operate independently, and we may incur significant costs that could materially adversely affect our business, financial condition and results of operations.
 
The requirements of being a public company may strain our resources and distract our management.
 
Following the spin-off, we will be required to comply with various regulatory and reporting requirements, including those required by the SEC. As a public company, we will be subject to the reporting requirements of the Exchange Act and the requirements of SOX. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. SOX requires that we maintain disclosure controls and procedures and internal control over financial reporting. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us and could have a material adverse effect on our business, financial condition or results of operations.
 
To operate as an independent public company, including maintaining the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff, provide additional management oversight and obtain additional operational and financial resources. Any expansion plans would require an even greater amount of management, financial and operational resources. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, harm our ability to operate our business and reduce the trading price of our common stock. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition or results of operations and limit our ability to implement our business strategies.
 
Prior to the distribution, we will transfer to American certain aircraft and certain other assets, which will result in the recognition of substantial amounts of taxable gain.
 
Prior to the distribution, all of our jet aircraft, certain fixed assets (including our leasehold improvements and certain ground handling assets) that relate to our regional flight operations and ground handling services, and certain intercompany receivables owed to us by American, will be transferred by us to American. In consideration for the transfer of the jet aircraft by us to American, American will take the jet aircraft subject to, and we will be released from, indebtedness related thereto. See “Agreements with AMR and Its


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Affiliates — Purchase Agreement and Other Asset Transfers and Restructurings.” These asset transfers will be treated as taxable sales for U.S. Federal income tax purposes and will result in the recognition of substantial amounts of taxable gain by us, which gain will be includible in the U.S. Federal consolidated tax return filed by the AMR consolidated group. AMR expects that no material amounts of U.S. Federal income taxes will be payable on this gain because the gain is expected to be offset by available NOL carryovers of the AMR consolidated group. However, this use of NOL carryovers will reduce the amount of future NOL carryovers available to us and the AMR consolidated group. Moreover, the AMR consolidated group may incur certain state income taxes on these asset transfers. We will not reimburse AMR for any tax liabilities, or reduction in tax attributes, arising as a result of the transfer of assets to American.
 
Certain of the contracts and assets to be transferred or assigned to us contain provisions requiring the consent of a third party. If such consent is not given, we may not be entitled to the benefit of such contracts and assets in the future.
 
Certain of the contracts and assets to be transferred or assigned to us in connection with the reorganization, separation and distribution require the consent of a third party to transfer or assign such contract or asset. Although we currently intend to seek such consents, if we are unable to obtain such consents on commercially reasonable and satisfactory terms, our ability to obtain the benefit of such contracts and assets in the future may be impaired.
 
American will also license to us the right to use certain of its facilities in our operations on behalf of American. We may not obtain the consent of a third party to these license arrangements based on our belief that no consent is required. It is possible that a third party may take the position that a consent was required and if this position prevails, our ability to use these facilities may be materially adversely impacted.
 
Risks Relating to our Common Stock and the Securities Market
 
There is no existing market for our common stock and we cannot be certain that an active trading market will develop or be sustained after the distribution, and following the distribution, our stock price may fluctuate significantly.
 
There is currently no public market for our common stock. It is anticipated that before the distribution date, trading of shares of our common stock will begin on a “when-issued” basis and such trading will continue up to and including the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the distribution or be sustained in the future. The lack of an active market may make it more difficult for you to sell our shares and could lead to our share price being depressed or more volatile.
 
We cannot predict the prices at which our common stock may trade after the distribution. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:
 
  •  our business profile and market capitalization may not fit the investment objectives of some AMR stockholders and, as a result, these AMR stockholders may sell our shares after the distribution;
 
  •  American’s exercise of its aircraft withdrawal rights under the Air Services Agreement;
 
  •  success or failure of our efforts to obtain business from other airlines and other parts of our business strategy;
 
  •  actual or anticipated fluctuations in our operating results due to other factors related to our business;
 
  •  our quarterly or annual earnings, or those of other companies in our industry;
 
  •  our ability to obtain financing as needed;
 
  •  announcements by us or our competitors of significant acquisitions or dispositions;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;


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  •  the failure of securities analysts to cover our common stock after the spin-off;
 
  •  changes in earnings estimates by securities analysts or our ability to meet those estimates;
 
  •  the operating and stock price performance of other comparable companies;
 
  •  overall market fluctuations;
 
  •  changes in laws and regulations affecting our business; and
 
  •  general economic conditions and other external factors.
 
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. This has been particularly true in recent years. These broad market fluctuations could adversely affect the trading price of our common stock.
 
Substantial sales of common stock may occur in connection with the distribution, which could cause our stock price to decline.
 
The shares of our common stock that AMR distributes to its stockholders generally may be sold immediately in the public market. Although we have no actual knowledge of any plan or intention on the part of any significant stockholder to sell our common stock following the distribution, it is possible that some AMR stockholders, possibly including some of our larger stockholders, will sell our common stock received in the distribution. The sales of significant amounts of our common stock or the perception in the market that this will occur may cause the market price of our common stock to decline.
 
Your percentage ownership in Eagle will be diluted in the future.
 
Your percentage ownership in Eagle will be diluted in the future because of AMR common stock-based equity awards that have been granted to employees of Eagle that will be converted into Eagle common stock-based equity awards upon consummation of the distribution, as well as any additional Eagle common stock-based equity awards that are granted to our directors, officers and employees in the future. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments we may make in the future.
 
Certain contractual provisions in our Spin-Off Agreements and provisions in our amended and restated certificate of incorporation and amended and restated by-laws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.
 
Certain contractual provisions in our Spin-Off Agreements may prevent or delay an acquisition of our company. Under the Tax Matters Agreement, during the two-year period following the distribution, we may not, subject to certain exceptions, enter into or authorize any transaction resulting in the acquisition of our common stock or assets beyond certain thresholds and certain other transactions, unless certain conditions are satisfied. In addition, some of our Spin-Off Agreements, including the Air Services Agreement and Ground Handling Agreement, may be terminated by American if there is a change of control of our company.
 
Our amended and restated certificate of incorporation and amended and restated by-laws and Delaware law contain provisions that may deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the potential acquiror and to encourage potential acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings and the right of our board to issue preferred stock without stockholder approval.
 
Delaware law also imposes some restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding common stock and us. For more information, see “Description of Our Capital Stock — Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and By-laws.”
 
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board and by providing our board with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers.


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However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board determines is not in the best interests of our company and our stockholders.
 
In addition, to avoid a potential adverse effect on our ability to use the NOL carryover allocable to us for U.S. Federal income tax purposes, our amended and restated certificate of incorporation will contain a “5% Ownership Limitation,” which will prohibit certain transfers of our stock. The purpose of these transfer restrictions is to prevent a change of ownership from occurring within the meaning of Section 382 of the Internal Revenue Code (which ownership change would materially and adversely affect our ability to use the NOL carryover allocable to us from the AMR consolidated group). The 5% Ownership Limitation will be applicable to all stockholders except [•] and could prevent our stockholders from engaging in certain transactions in our common stock. See “Description of Our Capital Stock — Common Stock — 5% Ownership Limitation.”
 
Our charter documents include provisions limiting voting by foreign owners.
 
Our amended and restated certificate of incorporation provides that no shares of capital stock may be voted by or at the direction of persons who are not citizens of the United States unless the shares are registered on a separate stock record. Our amended and restated by-laws further provide that no shares will be registered on this separate stock record if the amount so registered would exceed applicable foreign ownership restrictions. U.S. law currently requires that no more than 25% of the voting stock of our company (or any other domestic airline) may be owned directly or indirectly by persons who are not citizens of the United States. See “Description of Our Capital Stock — Common Stock — Voting Rights.”


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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
 
This Information Statement contains various “forward-looking statements” which represent our expectations or beliefs concerning future events. When used in this document, the words “expects,” “estimates,” “plans,” “anticipates,” “indicates,” “believes,” “projects,” “forecast,” “guidance,” “outlook,” “may,” “will,” “should,” “could,” “seeks,” “targets” and similar expressions are intended to identify forward-looking statements. Similarly, statements that describe our strategies, objectives, plans or goals, or actions we may take in the future, are forward-looking statements. Forward-looking statements include, without limitation:
 
  •  the expected benefits of the separation;
 
  •  our business strategies, plans and objectives, including the anticipated impact of such strategies, plans and objectives;
 
  •  our future operating and financial performance;
 
  •  our expectations concerning operations and financial conditions, including changes in utilization, revenues, and costs;
 
  •  expectations regarding opportunities for growth;
 
  •  future financing plans and needs; and
 
  •  overall economic and industry conditions.
 
Other forward-looking statements include statements which do not relate solely to historical facts, such as statements which discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward-looking statements in this Information Statement are based upon information available to us on the date of this Information Statement. Neither we nor AMR undertakes any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements are subject to a number of factors that could cause our actual results to differ materially from our expectations. The factors discussed or referenced under the section “Risk Factors” could cause our actual results to differ materially from historical results and from those expressed in forward-looking statements.


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THE SPIN-OFF
 
Background
 
On [•], 2011, the AMR board of directors approved the complete legal and structural separation of Eagle from AMR, following which Eagle will be an independent, publicly-traded company. On [•], 2011, we changed the name of our company from AMR Eagle Holding Corporation to [•]. Prior to or contemporaneously with the distribution, among other things, (i) all of our jet aircraft and certain intercompany receivables owed to us by American (including our $293 million account receivable due from American at June 30, 2011), will be transferred to American; (ii) in consideration for the transfer of the jet aircraft by us to American, American will take the jet aircraft subject to, and we will be released from, indebtedness related to the aircraft, on which AMR is already the guarantor; (iii) certain of the fixed assets, including leasehold improvements and certain ground handling assets, that relate to our regional flight operations and ground handling services will be transferred from Eagle to American; (iv) certain of the airport leasehold interests relating to our regional flight operations and ground handling services will be assigned to American, to the extent permitted by third parties; (v) all airport operating rights relating to our regional flight operations will either be corrected or reallocated to American, to the extent permitted by third parties; (vi) we will effect a recapitalization so that the number of outstanding shares of our common stock will be equal to the number of shares to be distributed by AMR in the distribution; (vii) certain payables aggregating approximately $135 million at June 30, 2011, will be retained by us, but American or AMR will agree to be responsible for, and we will be released from, certain other payables, workers’ compensation liabilities and accrued interest (totaling approximately $50 million at June 30, 2011) that we previously incurred on their behalf; (viii) any remaining intercompany payables and receivables between us and our affiliates, on the one hand, and AMR and its other affiliates, on the other hand, that have not been previously settled, will be settled; and (ix) AMR will make a capital contribution to us currently contemplated to be approximately $50 million in cash. For more information, see “Agreements with AMR and Its Affiliates.”
 
To accomplish the spin-off, AMR will, following the reorganization, distribute all of its equity interest in us, consisting of all of the outstanding shares of our common stock, to AMR stockholders on a pro rata basis. Following the distribution, AMR will not own any equity interest in us, and we will operate independently from AMR. No vote of AMR’s stockholders is required or is being sought in connection with the distribution, and AMR’s stockholders will not have any appraisal rights in connection with the distribution.
 
The distribution of our common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. In addition, AMR has the right not to complete the distribution if, at any time, the board of directors of AMR determines, in its sole discretion, that the spin-off is not in the best interests of AMR or its stockholders, or that market conditions are such that it is not advisable to separate Eagle from AMR. For a more detailed description, see “— Conditions to the Distribution.”
 
Reasons for the Spin-Off
 
The AMR board of directors has regularly reviewed the businesses that comprise AMR to ensure that AMR’s resources are being put to use in a manner that is in the best interests of AMR and its stockholders. In reaching the decision to separate Eagle and to pursue a spin-off of Eagle, the AMR board considered a wide range of potential structural alternatives for Eagle, such as a sale or merger of some or all of the Eagle business to or with third parties, and a variety of different approaches to separating some or all of the Eagle business as a stand-alone entity or entities. AMR’s management retained Evercore Partners and Citigroup Global Markets Inc. to advise management and assist in the evaluation of a range of strategic alternatives with respect to AMR’s ownership of Eagle. The board evaluated these alternatives with the goal of enhancing stockholder value with the input and advice of AMR and Eagle management. As part of this evaluation, the board considered a number of factors, including the strategic focus and flexibility for AMR and Eagle, the ability of AMR and Eagle to compete and operate efficiently and effectively, the financial profile of AMR and Eagle, the potential reaction of investors and the probability of successful execution of the various structural alternatives and the risks associated with those alternatives.


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As a result of this evaluation, the AMR board of directors determined that proceeding with a spin-off of Eagle would be in the best interests of AMR and its stockholders. The board considered the following benefits of this approach:
 
  •  Improved Positioning for Eagle’s Growth.  As part of a combined company, Eagle’s growth initiatives were limited in terms of available funding, resources and prioritization, as compared to American’s other business operations. Eagle’s ability to pursue regional flight operations and ground handling business with other airlines was also limited because of its ownership by American, a competitor airline. The separation of Eagle should provide Eagle with more flexibility to conduct its operations, invest in its business and pursue growth opportunities.
 
  •  Maximizing Eagle’s Potential.  The separation of Eagle should also provide Eagle with more flexibility to restructure its operations and operating costs, as appropriate or necessary, to reflect current market forces and compete more effectively in the market. Any such restructuring should increase the probability of long-term success of Eagle and should position Eagle competitively to retain and earn a portion of American’s existing or new business and to pursue other growth opportunities.
 
  •  Potential Diversification of American’s Regional Flight Operations.  Although American will commit to having Eagle initially provide regional flight operations for a nine-year term following the spin-off, American believes that the separation of Eagle and the ability to withdraw aircraft during the term of the Air Services Agreement will provide American with the flexibility to seek additional and future regional flight capacity from other regional airlines. This potential diversification of American’s regional feed will enhance American’s ability to continue to source regional flight operations at competitive market rates. In addition, diversification of American’s regional feed would reduce the risks associated with dependence on primarily one provider for regional flight operations.
 
  •  Capital Allocation and Availability.  As separate entities, AMR and Eagle will have more efficient capital structures through which to fund their growth. The separated companies will not compete internally for capital and both companies will have more flexibility to access capital markets. This will also provide each company’s management more control over capital resources from which to make strategic investments in their respective businesses. As a wholly-owned private company, Eagle was limited in funding its business operations solely from AMR. As an independent, publicly-traded company, Eagle should have greater access to more diverse sources of financing.
 
  •  Investor Choice.  The spin-off will allow investors to make independent investment decisions with respect to AMR and Eagle. Investment in one or the other company may appeal to investors with different goals, interests and concerns.
 
The board of directors of AMR also considered the costs and risks associated with the spin-off. The board of directors of AMR considered, among other factors, any potential negative impact on AMR credit ratings as a result of the divestiture of our assets, the possibility that we may experience disruptions in our business as a result of the spin-off, the risk that the combined trading prices of our common stock and AMR common stock after the distribution may be lower than the trading price of AMR common stock before the distribution, the loss of synergies from operating as one company, and the additional legal, accounting and administrative costs associated with our becoming a separate, publicly-traded company. The board of directors of AMR also considered the limitations on our business growth prospects under the Spin-Off Agreements, our need to capitalize our business appropriately as a stand-alone entity and the allocation of future growth opportunities. In view of the variety of factors considered in connection with the evaluation of the spin-off and the complexity of these matters, AMR’s board of directors did not find it useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to the factors considered. The board of directors of AMR concluded, however, that the potential benefits of the spin-off outweigh the potential negative factors and that separating the business of Eagle from AMR in the form of a tax-free distribution to AMR stockholders is appropriate and advisable for AMR and its stockholders.


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Treatment of 401(k) Shares for Employees and Former Employees
 
We will provide benefit plans and arrangements in which our employees will participate following the spin-off. Generally, vested and certain unvested account balances under AMR’s tax-qualified savings plan that relate to our current employees will be transferred directly to the tax-qualified savings plan that we will establish. See “Agreements with AMR and Its Affiliates — Separation and Distribution Agreement — Employee Matters.”
 
Interests of Certain Persons in the Spin-Off
 
On June 10, 2010, AMR and American entered into an American Eagle Assignment Agreement with Mr. Garton. This agreement provides certain compensation to Mr. Garton if the spin-off is completed or if AMR otherwise divests Eagle. For a description of the agreement, see “Executive Compensation — Discussion Regarding Fiscal Year 2008, 2009 and 2010 Summary Compensation Table and Fiscal Year 2010 Grants of Plan-Based Awards Table — Assignment Agreement with Mr. Garton.”
 
In November 2010, AMR also entered into an arrangement with John Hutchinson, our Senior Vice President — Finance and Planning and Chief Financial Officer, in connection with the proposed spin-off transaction. See “Executive Compensation — Arrangement with Mr. Hutchinson.”
 
In May 2011, the AMR Compensation Committee determined that it was necessary to retain Fred Cleveland, our Senior Vice President & COO — Technical Services, through the spin-off to ensure continuity of leadership and to provide Eagle with substantial industry business experience during its transition to operation as an independent, publicly-traded company. As a result, the committee decided to vest Mr. Cleveland in the retirement air travel perquisite described under “Executive Compensation — Post-Employment Compensation — Retirement” if he remains employed by Eagle through June 1, 2014.
 
Each of our directors, officers or employees will be indemnified by us in the event he or she becomes a party to a proceeding due to his or her status as our director, officer or employee, unless he or she was engaged in willful misconduct or a knowing violation of criminal law.
 
Except for the foregoing, none of our directors or officers or AMR’s directors or officers will receive any benefits or remuneration not received by stockholders in connection with the distribution.
 
Manner of Effecting the Spin-Off
 
AMR will effect the spin-off by distributing to its stockholders, as a pro rata distribution, one share of our common stock for every [•] shares of AMR common stock outstanding as of [•], 2011, the record date of the distribution.
 
Prior to the distribution, AMR will deliver all of the issued and outstanding shares of our common stock to the distribution agent. Following the distribution date, which is [•], 2011, the distribution agent will electronically deliver the shares of our common stock issuable in the distribution to you or your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording share ownership where no physical share certificates are issued to stockholders, as is the case in this distribution.
 
Commencing on or shortly after the distribution date, if you are a registered holder of AMR shares entitled to shares of our common stock, the distribution agent will mail to you an account statement that indicates the number of shares of our common stock that have been registered in book-entry form in your name.
 
Please note that if you sell any of your shares of AMR common stock on or before the distribution date, the buyer of those shares, and not you, may in certain circumstances be entitled to receive the shares of our common stock issuable in respect of the AMR shares sold. See “— Trading Prior to the Distribution Date” for more information.


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A number of AMR stockholders hold their AMR common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your AMR common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the common stock of our company that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in street name, we encourage you to contact your bank or brokerage firm.
 
Stockholders of AMR are not being asked to take any action in connection with the distribution. No stockholder approval of the distribution is required or is being sought. We are not asking you for a proxy, and request that you not send us a proxy. You are also not being asked to surrender any of your shares of AMR common stock for shares of our common stock. The number of outstanding shares of AMR common stock you own will not change as a result of the distribution.
 
We expect to incur approximately $[•] million of costs associated with the separation, primarily related to consulting and audit fees, board search and recruiting costs and legal expenses. Substantially all of these costs have been or will be funded directly by AMR or American, and some will be funded by us using the capital contribution to be paid by AMR to us.
 
Treatment of Fractional Shares
 
The distribution agent will not distribute any fractional shares in connection with the distribution. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each AMR stockholder who would otherwise have been entitled to receive a fractional share in the distribution. The distribution agent will, in its sole discretion, without any influence by AMR or us, determine when, how, through which broker-dealer and at what price to sell the shares. The distribution agent and any broker-dealer used by the distribution agent will not be an affiliate of either AMR or us.
 
The distribution agent will send a check to each registered holder of AMR common stock who is entitled to a fractional share representing the cash amount deliverable in respect of the stockholder’s fractional share interest as soon as practicable following the distribution date. If you hold your shares through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the aggregate net cash proceeds from the sales. No interest will be paid on any cash distributed in respect of fractional shares. The receipt of cash in respect of fractional shares will generally be taxable to the recipients. See “— Material U.S. Federal Income Tax Consequences of the Distribution” below for more information.
 
Material U.S. Federal Income Tax Consequences of the Distribution
 
The following is a summary of the material U.S. Federal income tax consequences to the holders of AMR common stock in connection with the distribution. This summary is based on the Internal Revenue Code, the Treasury Regulations promulgated thereunder and judicial and administrative interpretations thereof, in each case as in effect and available as of the date of this Information Statement and all of which are subject to change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below.
 
This summary is limited to holders of AMR common stock that are U.S. Holders, as defined immediately below. A U.S. Holder is a beneficial owner of AMR common stock that is for U.S. Federal income tax purposes:
 
  •  an individual who is a citizen or a resident of the United States;
 
  •  a corporation, or other entity taxable as a corporation for U.S. Federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;
 
  •  an estate, the income of which is subject to U.S. Federal income taxation regardless of its source; or


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  •  a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more United States persons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under the law in effect before 1997, a valid election is in place under applicable Treasury Regulations.
 
This summary also does not discuss all tax considerations that may be relevant to stockholders in light of their particular circumstances, nor does it address the consequences to stockholders subject to special treatment under the U.S. Federal income tax laws, such as:
 
  •  non-U.S. persons;
 
  •  dealers or brokers in securities or currencies;
 
  •  tax-exempt entities;
 
  •  banks, financial institutions or insurance companies;
 
  •  real estate investment trusts, regulated investment companies (including mutual funds) or grantor trusts;
 
  •  persons who acquired AMR common stock pursuant to the exercise of employee stock options or otherwise as compensation;
 
  •  stockholders who own, or are deemed to own, at least 10% or more, by voting power or value, of AMR equity;
 
  •  holders owning AMR common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. Federal income tax purposes;
 
  •  certain former citizens or long-term residents of the United States;
 
  •  corporations that are subject to the alternative minimum tax; or
 
  •  persons that own AMR common stock through partnerships or other pass-through entities.
 
This summary does not address the U.S. Federal income tax consequences to AMR stockholders who do not hold AMR common stock as a capital asset. Moreover, this summary does not address any state, local or foreign tax consequences or any estate, gift or other non-income tax consequences.
 
If a partnership (or any other entity treated as a partnership for U.S. Federal income tax purposes) holds AMR common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to its tax consequences.
 
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE DISTRIBUTION.
 
The Distribution and Tax-Free Transaction Status
 
The distribution is conditioned on the receipt by AMR, on or before the distribution date, of a private letter ruling from the IRS and an opinion of Baker Botts L.L.P., in each case, substantially to the effect that, for U.S. Federal income tax purposes, the distribution (i) will qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, (ii) will not result in taxable gain or loss to AMR (apart from gain recognition on the transfer of aircraft and certain other assets from Eagle to American prior to the spin-off) and (iii) will not result in gain or loss to the stockholders of AMR, except to the extent of cash received in respect of fractional shares. AMR may waive receipt of either or both of the tax opinion or private letter ruling as a condition to the distribution.
 
Assuming the distribution qualifies as a tax-free distribution, then for U.S. Federal income tax purposes:
 
  •  the distribution will not result in any taxable income, gain or loss to AMR (apart from gain recognition on the transfer of aircraft and certain other assets from Eagle to American prior to the spin-off);


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  •  no gain or loss will be recognized by, or be includible in the income of, an AMR stockholder upon receipt of shares of our common stock in the distribution;
 
  •  any cash received in respect of fractional share interests in our common stock will give rise to taxable gain or loss equal to the difference between the amount of cash received and the tax basis allocable to the fractional share interests (determined as described below), and such gain or loss will be capital gain or loss if the AMR common stock on which the distribution is made is held as a capital asset on the distribution date;
 
  •  the aggregate tax basis of the AMR common stock and our common stock in the hands of each AMR stockholder immediately after the distribution (including any fractional interests to which the stockholder would be entitled) will equal the aggregate tax basis of the AMR common stock held by the holder immediately before the distribution, allocated between the common stock of AMR and our common stock in proportion to their relative fair market values on the distribution date; and
 
  •  the holding period of our common stock received by each AMR stockholder will include the holding period of its AMR common stock.
 
AMR’s stockholders that have acquired different blocks of AMR common stock at different times or at different prices should consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, shares of our common stock distributed with respect to such blocks of AMR common stock.
 
Although a private letter ruling relating to the qualification of the distribution under Section 355 of the Internal Revenue Code will generally be binding on the IRS, if the factual representations or assumptions made in the ruling request are inaccurate or incomplete in any material respect, we may not be able to rely on the ruling. Furthermore, the IRS will not rule on whether a distribution satisfies certain requirements necessary to obtain tax-free treatment under Section 355 of the Internal Revenue Code, including with respect to the business purpose for the spin-off (which is required to be a corporate, rather than a stockholder level, business purpose) and with respect to whether the spin-off is a device for the distribution of earnings and profits (which is a facts and circumstances analysis). Rather, such a private letter ruling is based upon representations by AMR that a business purpose exists for the spin-off and that the spin-off is not a device for the distribution of earnings and profits. Any inaccuracy in such representations could invalidate the private letter ruling. Therefore, in addition to obtaining the ruling from the IRS, AMR has made it a condition to the distribution that AMR obtain the opinion of Baker Botts L.L.P., as described above. The opinion will rely on the private letter ruling as to matters covered by the ruling. In addition, the opinion will be based on, among other things, various factual representations and assumptions made by AMR and us. If any of these factual representations or assumptions are incorrect or incomplete in any material respect, the opinion rendered by Baker Botts L.L.P. could be invalidated. Opinions of counsel are not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion of Baker Botts L.L.P. As a result, the conclusions expressed in the opinion of Baker Botts L.L.P. could be challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences to you could be materially less favorable.
 
Tax Consequences if the Distribution is Not a Tax-Free Transaction
 
Notwithstanding receipt by AMR of the ruling and opinion of counsel, the IRS could assert that the distribution does not qualify as a tax-free distribution for U.S. Federal income tax purposes. If the distribution were not to qualify as a tax-free transaction, AMR would be subject to tax as if it had sold our common stock in a taxable sale for its fair market value and each AMR stockholder who received our common stock in the distribution would generally be treated as if it had received a distribution in an amount equal to the fair market value of our common stock received, which would generally result in:
 
  •  a taxable dividend to the extent of the stockholder’s pro rata share of AMR’s current and accumulated earnings and profits;
 
  •  a reduction in the stockholder’s basis (but not below zero) in AMR common stock to the extent the amount received exceeds the stockholder’s share of AMR’s earnings and profits; and


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  •  a taxable capital gain from the exchange of AMR common stock to the extent the amount received exceeds both the stockholder’s share of AMR’s earnings and profits and the basis in the stockholder’s AMR common stock.
 
In addition, even if the distribution were to otherwise qualify under Section 355 of the Internal Revenue Code, it may be taxable to AMR (but not to AMR’s stockholders) under Section 355(e) of the Internal Revenue Code, if the spin-off were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire directly or indirectly stock representing a 50% or greater interest in AMR or us. For this purpose, any acquisitions of AMR common stock or of our common stock within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although we or AMR may be able to rebut that presumption.
 
In connection with the spin-off, we and AMR will enter into a Tax Matters Agreement pursuant to which we will agree to be responsible for certain liabilities and obligations following the spin-off. In general, under the terms of the Tax Matters Agreement, in the event the distribution fails to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code (including as a result of Section 355(e) of the Internal Revenue Code), and if such failure was the result of actions taken after the distribution by AMR or us, the party responsible for such failure would be responsible for all taxes imposed on AMR to the extent that such taxes result from such actions. Furthermore, if the failure was not the result of actions taken after the distribution by AMR or us, AMR would be responsible for all tax-related liabilities arising as a result of the distribution failing to qualify as a tax-free distribution for U.S. Federal income tax purposes. For a more detailed discussion, see the section entitled “Agreements with AMR and Its Affiliates — Tax Matters Agreement.” Our indemnification obligations to AMR and its affiliates are not limited in amount or subject to any cap. If we are required to indemnify AMR and its affiliates under the circumstances set forth in the Tax Matters Agreement, we may be subject to substantial liabilities.
 
The foregoing is a summary of certain U.S. Federal income tax consequences of the distribution under current law and is for general information only. The foregoing does not purport to address all U.S. Federal income tax consequences or tax consequences that may arise under the tax laws of other jurisdictions or that may apply to particular categories of stockholders. You should consult your tax advisor as to the particular tax consequences of the distribution, including the application of U.S. Federal, state, local and foreign tax laws, and the effect of possible changes in tax laws that may affect the tax consequences described above.
 
Asset Transfers Occurring Prior to Spin-off
 
Prior to the distribution, all of our jet aircraft, certain fixed assets (including leasehold improvements and certain ground handling assets) that relate to our regional flight operations and ground handling services, and certain intercompany receivables owed to us by American, will be transferred by us to American. In consideration for the transfer of the jet aircraft by us to American, American will take the jet aircraft subject to, and we will be released from, indebtedness related to the aircraft, on which AMR is already the guarantor. See “Agreements with AMR and Its Affiliates — Purchase Agreement and Other Asset Transfers and Restructurings.” These asset transfers will be treated as taxable sales for U.S. Federal income tax purposes and will result in the recognition of substantial amounts of taxable gain by us, which gain will be includible in the U.S. Federal consolidated tax return filed by the AMR consolidated group. AMR expects that no material amounts of U.S. Federal income taxes will be payable on this gain because the gain is expected to be offset by available NOL carryovers of the AMR consolidated group. However, this use of NOL carryovers will reduce the amount of future NOL carryovers available to us and the AMR consolidated group. Moreover, the AMR consolidated group may incur certain state income taxes on these asset transfers. We will not reimburse AMR for any tax liabilities, or reduction in tax attributes, arising as a result of the transfer of assets to American.
 
Information Statement
 
U.S. Treasury Regulations require each AMR stockholder that immediately before the distribution owned 5% or more (by vote or value) of the total outstanding stock of AMR to attach to such stockholder’s


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U.S. Federal income tax return for the year in which such stock is received a statement setting forth certain information related to the tax-free nature of the distribution.
 
Results of the Distribution
 
After the distribution, we will be an independent, publicly-traded company. Immediately following the distribution, we estimate we will have approximately [•] million shares of our common stock issued and outstanding (based on the number of shares of AMR common stock expected to be outstanding as of the record date). The actual number of shares of our common stock to be distributed in the distribution will depend on the actual number of shares of AMR common stock outstanding on the record date. The distribution will not affect the number of outstanding shares of AMR common stock, although we expect the trading price of shares of AMR common stock immediately following the distribution to be lower than immediately prior to the distribution because its trading price will no longer reflect the value of the Eagle business. Furthermore, until the market has fully analyzed the value of AMR without the Eagle business, the price of shares of AMR common stock may trade with increased volatility.
 
Prior to the spin-off, we will enter into a Separation and Distribution Agreement and additional agreements with AMR and American, including the Air Services Agreement and the Ground Handling Agreement. These agreements will govern the relationship between Eagle and AMR and its affiliates up to and subsequent to the completion of the separation, provide for the transfer, assignment or reallocation of assets and past and future liabilities and obligations between Eagle and AMR and its affiliates, and set forth the terms and conditions for the business and services conducted between Eagle and our affiliates, on the one hand, and AMR and its affiliates, on the other hand, following the spin-off. We describe these arrangements in greater detail under “Agreements with AMR and Its Affiliates.”
 
Listing and Trading of our Common Stock
 
As of the date of this Information Statement, we are a wholly-owned subsidiary of AMR. Accordingly, there is currently no public market for our common stock, although a “when-issued” market in our common stock may develop prior to the distribution. See “— Trading Prior to the Distribution Date” below for an explanation of a “when-issued” market. We intend to list our shares of common stock on the [•] under the symbol “[•].” Following the distribution, AMR common stock will continue to trade on the New York Stock Exchange under the symbol “AMR.”
 
Neither we nor AMR can assure you as to the trading price of AMR common stock or our common stock after the distribution, or as to whether the combined trading prices of our common stock and the AMR common stock after the distribution will be less than, equal to or greater than the trading prices of AMR common stock prior to the distribution. The trading price of our common stock may fluctuate significantly following the distribution. See “Risk Factors — Risks Relating to our Common Stock and the Securities Market” for more detail.
 
The shares of our common stock distributed to AMR stockholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the distribution include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for Federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act of 1933, as amended (“the Securities Act”), or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Section 4(1) of the Securities Act or Rule 144 thereunder.
 
Trading Prior to the Distribution Date
 
It is anticipated that prior to the distribution and continuing through the distribution date, there will be a “when-issued” market in our common stock. When-issued trading refers to the purchase or sale of our common stock on or before the distribution date on a conditional basis because our shares of common stock will have been authorized but will not yet have been issued. On the first trading day following the distribution


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date, any when-issued trading in respect of our common stock will end and “regular-way” trading will begin. Regular-way trading refers to trading after the security has been distributed.
 
The when-issued trading market will be a market for the shares of our common stock that will be distributed to AMR stockholders on the distribution date. If you own shares of AMR common stock at the close of business on the record date, you will be entitled to shares of our common stock distributed pursuant to the distribution. You may trade this entitlement to shares of our common stock, without the shares of AMR common stock you own, on the when-issued market. On the first trading day following the distribution date, we expect when-issued trading with respect to our common stock will end and regular-way trading will begin.
 
Following the distribution date, we expect shares of our common stock to be listed on the [•] under the trading symbol “[•].” We will announce our trading symbol for when-issued trading when and if it becomes available.
 
It is also anticipated that AMR common stock will continue to trade on a “regular-way” market, and an “ex-distribution” market may develop prior to the distribution. Shares of AMR common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you sell shares of AMR common stock in the regular-way market up to and including the distribution date, you will be selling your right to receive shares of our common stock in the distribution. If an ex-distribution market develops prior to the distribution, shares that trade on the ex-distribution market would trade without an entitlement to shares of our common stock distributed pursuant to the distribution. If you own shares of AMR common stock at the close of business on the record date and sell those shares on the ex-distribution market up to and including the distribution date, you would still receive the shares of our common stock that you would otherwise be entitled to receive pursuant to the distribution. If you plan to sell your shares of AMR common stock prior to the distribution date, you should consult with your stockbroker, bank or other nominee and discuss whether you want to sell your AMR common stock or the Eagle common stock you will receive in the distribution, or both.
 
Conditions to the Distribution
 
We expect that the separation and distribution will be effective on the distribution date, provided that the following conditions shall have been satisfied or waived by AMR:
 
  •  the board of directors of AMR shall have authorized and approved the separation and distribution and not withdrawn such authorization and approval, and shall have declared the dividend of Eagle common stock to AMR stockholders;
 
  •  the Separation and Distribution Agreement and each ancillary agreement contemplated by the Separation and Distribution Agreement shall have been executed by each party thereto;
 
  •  the SEC shall have declared effective our Registration Statement on Form 10, of which this Information Statement is a part, under the Exchange Act, and no stop order suspending the effectiveness of the Registration Statement shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the SEC;
 
  •  our common stock shall have been accepted for listing on the [•] or another national securities exchange approved by AMR, subject to official notice of issuance;
 
  •  the reorganization shall have been completed to the satisfaction of AMR;
 
  •  AMR shall have received a private letter ruling from the IRS, and an opinion from Baker Botts L.L.P., in each case, substantially to the effect that for U.S. Federal income tax purposes, the distribution (i) will qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, (ii) will not result in taxable gain or loss to AMR (apart from gain recognition on the transfer of aircraft and certain other assets from Eagle to American prior to the spin-off) and (iii) will not result in gain or loss to the stockholders of AMR, except to the extent of cash received in respect of fractional shares;


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  •  no order, injunction or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution shall be in effect, and no other event outside the control of AMR shall have occurred or failed to occur that prevents the consummation of the distribution;
 
  •  no other events or developments shall have occurred prior to the distribution date that, in the judgment of the board of directors of AMR, would result in the spin-off having a material adverse effect on AMR or its stockholders;
 
  •  prior to the distribution date, this Information Statement shall have been mailed to the holders of AMR common stock as of the record date;
 
  •  AMR, the current stockholder of Eagle, shall have duly elected the individuals listed in this Information Statement as members of our post-distribution board of directors, and such individuals shall be the members of our board of directors immediately after the distribution;
 
  •  immediately prior to the distribution date, our amended and restated certificate of incorporation and amended and restated by-laws, each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, shall be in effect; and
 
  •  the AMR board shall have received an opinion from a third party financial advisor relating to the solvency and capital adequacy of AMR following the distribution.
 
The fulfillment of the foregoing conditions will not create any obligation on the part of AMR to effect the distribution. AMR has the right not to complete the distribution if, at any time, the board of directors of AMR determines, in its sole discretion, that the spin-off is not in the best interests of AMR or its stockholders, or that market conditions are such that it is not advisable to separate Eagle from AMR.
 
Reasons for Furnishing this Information Statement
 
This Information Statement is being furnished solely to provide information to AMR stockholders who will receive shares of our common stock in the distribution. It is not to be construed as an inducement or encouragement to buy or sell any of our securities or any securities of AMR. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither we nor AMR undertakes any obligation to update the information except in the normal course of our respective public disclosure obligations and practices.
 
DIVIDEND POLICY
 
We intend to retain future earnings for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends for the foreseeable future. The decision whether to pay future dividends will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our board of directors deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends.


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CAPITALIZATION
 
The following table sets forth the cash and cash equivalents and capitalization of Eagle at June 30, 2011, on a historical basis and a pro forma basis to give effect to the reorganization (including transfers of certain assets and liabilities) and the spin-off as if they occurred on June 30, 2011. You can find an explanation of the pro forma adjustments made to our historical consolidated financial statements under “Unaudited Pro Forma Consolidated Financial Information.” You should review the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Consolidated Financial Information” and the consolidated financial statements and accompanying notes included elsewhere in this Information Statement.
 
                 
    June 30, 2011  
    Actual     Pro Forma  
    (Unaudited)     (Unaudited)  
    ($ in thousands)  
 
Cash and cash equivalents
  $ 5,092     $ 52,892 (1)
                 
Current and long-term debt, including capital leases
    2,189,572       381  
Stockholders’ equity (deficit):
               
Common stock, par value $1.00 per share, 1,000 shares outstanding, actual; par value $0.01 per share, [•] shares outstanding, pro forma
    1       1 (2)
Additional paid-in capital
    315,589       273,321  
Retained earnings
    50,813       50,813  
                 
Total stockholders’ equity
    366,403       324,135  
                 
Total capitalization
  $ 2,555,975     $ 324,516  
                 
 
 
(1) Assumes a cash contribution of $50 million from AMR contemporaneously with the distribution, net of amounts that will be refunded to American associated with domestic operations.
 
(2) Reflects an estimated [•] shares of our common stock expected to be distributed to the holders of AMR common stock in connection with the distribution, based on the number of shares of AMR common stock outstanding on [•], 2011.


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SELECTED HISTORICAL FINANCIAL DATA
 
The following tables present certain selected historical financial information as of and for each of the years in the five-year period ended December 31, 2010. The selected historical consolidated financial data as of December 31, 2010 and 2009 and for each of the fiscal years in the three-year period ended December 31, 2010 are derived from our historical audited consolidated financial statements included elsewhere in this Information Statement. The selected historical consolidated financial data as of December 31, 2008 and as of and for the years ended December 31, 2007 and 2006 are derived from our unaudited consolidated financial statements that are not included in this Information Statement. The selected historical consolidated financial data as of and for the six months ended June 30, 2010 and 2011, has been derived from our historical unaudited consolidated financial statements included elsewhere in this Information Statement. The unaudited financial statements have been prepared on the same basis as the audited financial statements, and in the opinion of our management include all adjustments, consisting of only ordinary recurring adjustments, necessary for a fair presentation of the information set forth in this Information Statement.
 
The selected historical financial data presented below should be read in conjunction with our consolidated financial statements and the accompanying notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Information Statement. For each of the periods presented, we were a subsidiary of AMR. Prior to the spin-off, we will enter into the Air Services Agreement and the Ground Handling Agreement with American. We believe these agreements will reflect current market rates, and they will provide us with substantially all of our revenue immediately after the spin-off. The financial information included herein may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly-traded company or had the Air Services Agreement and Ground Handling Agreement been in effect during the periods presented. In addition, our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from AMR, including changes in the financing, operations, cost structure and personnel needs of our business. Further, the historical financial information includes allocations of certain AMR corporate expenses. We believe the assumptions and methodologies underlying the allocation of general corporate expenses are reasonable. However, such expenses may not be indicative of the actual level of expenses that would have been incurred by us if we had operated as an independent, publicly-traded company or of the level of expenses to be incurred in the future.
 
                                                         
    Year Ended December 31,   Six Months Ended June 30,
    2006(1)   2007(1)   2008(2)(3)   2009(2)(3)   2010   2010   2011
($ in thousands)   (Unaudited)   (Unaudited)               (Unaudited)   (Unaudited)
 
Statement of Income Data
Total operating revenues
    $2,206,305     $ 2,313,171     $ 2,549,904     $ 2,117,288     $ 2,265,981     $ 1,096,341     $ 1,291,728  
Total operating expenses
    1,981,921       2,092,708       2,410,257       1,954,665       2,096,572       1,026,159       1,223,852  
Operating income
    224,384       220,463       139,647       162,623       169,409       70,182       67,876  
Other expense
    (137,961 )     (111,927 )     (108,858 )     (106,443 )     (98,153 )     (49,252 )     (50,820 )
Net income
    $53,450     $ 67,608     $ 20,801     $ 40,296     $ 40,902     $ 12,129     $ 9,911  
 
                                                         
    December 31,   June 30,
    2006   2007   2008   2009   2010   2010   2011
($ in thousands)   (Unaudited)   (Unaudited)   (Unaudited)           (Unaudited)   (Unaudited)
 
Balance Sheet Data
                                                       
Total assets
  $ 3,776,256     $ 3,583,176     $ 3,492,023     $ 2,716,416     $ 2,916,437     $ 2,667,857     $ 3,002,435  
Long-term debt, less current maturities
    2,414,205       2,096,587       1,924,095       1,741,124       1,848,975       1,667,675       1,909,474  
Total stockholder’s
equity
    810,247       895,085       918,320       310,348       355,263       324,160       366,403  
 


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        Six Months Ended
    Year Ended December 31,   June 30,
($ in thousands)   2006   2007   2008   2009   2010   2010   2011
 
Other Financial Data
                                                       
EBITDA(4)
  $ 435,433     $ 447,008     $ 339,611     $ 317,099     $ 324,004     $ 144,640     $ 153,152  
EBITDAR(4)
    454,751       459,442       348,026       346,666       353,026       159,088       167,795  
 
                                                         
    Year Ended December 31,   Six Months Ended June 30,
    2006   2007   2008   2009   2010   2010   2011
 
Regional Flight Operating Statistics
                                                       
Available seat miles (in thousands)(5)
    12,214,372       12,133,132       11,291,845       10,757,250       11,751,336       5,517,523       6,386,843  
Block hours(6)
    922,621       923,141       855,654       779,746       825,255       397,818       435,190  
Flight hours
    689,875       688,000       637,622       586,188       628,203       300,483       332,394  
Aircraft departures
    622,696       615,830       573,716       534,327       538,066       265,491       267,449  
Aircraft days
    108,718       107,919       102,674       94,651       96,553       46,882       50,910  
Average aircraft trip length (miles)
    396       399       396       395       431       411       437  
 
Ground Handling Operating Statistics
Handled departures
    560,127       578,656       565,934       557,260       578,322       286,393       293,039  
 
 
(1) For the fiscal year ended December 31, 2006 and the period ended June 30, 2007, our air services agreement with American contained rates whereby we would achieve a targeted pre-tax margin for providing “certain air services.” The pre-tax target margin was 6% and payment was based on a fee per block hour and departure. Certain pass-through costs were subject to a margin, including landing fees, airport facility rent costs, aircraft depreciation and aircraft interest expense. Aircraft fuel and insurance were passed through to American without a margin. Effective July 1, 2007, our air services agreement with American was substantially changed, whereby there was no longer a specified target margin in the agreement, classification of costs as pass through, controllable or absorbed changed, no margin was specifically paid on pass through costs, and aircraft specific rates were established based on aircraft days, block hours, flight hours, departures and total days and station-specific rates for ground handling.
 
(2) For the years ended December 31, 2008 and 2009, we recorded special charges of $115.3 million and $42.2 million, respectively, primarily related to aircraft impairment and employee related severance charges, as more fully described in Note 3 to our Consolidated Financial Statements. The aircraft related impairment charges were reimbursed as regional air services revenue under our agreement with American.
 
(3) For the year ended December 31, 2009, certain pass-through costs were classified differently than the year ended December 31, 2008. Passenger handling costs totaling $25.1 million were considered pass through or controllable in 2008, and such costs were absorbed by American for the year ended December 31, 2009. Portfolio interest totaling $13.0 million earned on our Funds due from AMR affiliates in 2008 reduced our regional air services revenue paid by American. In 2009, interest income earned did not impact operating revenues.
 
(4) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDAR is earnings before interest expense, income taxes, depreciation, amortization and aircraft rent. EBITDA and EBITDAR are not calculations based on generally accepted accounting principles and should not be considered as alternatives to net income or operating income as indicators of our financial performance or to cash flow as a measure of liquidity. In addition, our calculations may not be comparable to other similarly titled measures of other companies. EBITDA and EBITDAR are included as supplemental disclosures because they may provide useful information regarding our ability to service debt and lease payments and to fund capital expenditures. Our ability to service debt and lease payments and to fund capital expenditures in the future, however, may be affected by other operating or legal requirements or uncertainties. In addition, EBITDA and EBITDAR are well recognized performance measurements in the regional airline industry and, consequently, we have provided this information.

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The following represents a reconciliation of EBITDA and EBITDAR to net income for the periods indicated ($ in thousands):
 
                                                         
    Year Ended December 31,     Six Months Ended June 30,  
(Unaudited)   2006     2007     2008     2009     2010     2010     2011  
 
Net income
  $ 53,450     $ 67,608     $ 20,801     $ 40,296     $ 40,902     $ 12,129     $ 9,911  
Interest expense
    159,385       140,848       124,778       111,230       99,497       49,396       51,625  
Income taxes
    32,973       40,928       9,988       15,884       30,354       8,801       7,145  
Depreciation and amortization
    189,625       197,624       184,044       149,689       153,251       74,314       84,471  
                                                         
EBITDA
  $ 435,433     $ 447,008     $ 339,611     $ 317,099     $ 324,004     $ 144,640     $ 153,152  
Aircraft rent
    19,318       12,434       8,415       29,567       29,022       14,448       14,643  
                                                         
EBITDAR
  $ 454,751     $ 459,442     $ 348,026     $ 346,666     $ 353,026     $ 159,088     $ 167,795  
 
(5) Available seat miles are the number of passenger seats available multiplied by the number of scheduled miles those seats are flown.
 
(6) Block hours are the aggregate hours from gate departure to gate arrival for our fleet.


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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
 
We prepared the unaudited pro forma consolidated balance sheet and statements of income presented below from the historical consolidated financial statements of Eagle as of June 30, 2011 and for the year ended December 31, 2010 and the six months ended June 30, 2011, which are included elsewhere in this Information Statement. The pro forma adjustments give effect to the reorganization (including transfers of certain assets and liabilities), the spin-off and the agreements related to the spin-off, as described below. The unaudited pro forma consolidated balance sheet and statements of income should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this Information Statement.
 
The unaudited pro forma consolidated statements of income and balance sheet give effect to the divestiture of Eagle by AMR and certain transactions occurring prior to or contemporaneously with the spin-off, including the following transactions:
 
  •  the transfer of all of our jet aircraft, certain fixed assets (including leasehold improvements and certain ground handling assets) that relate to our regional flight operations and ground handling services, and certain intercompany receivables to American prior to the spin-off pursuant to a Master Purchase Agreement (the “Purchase Agreement”), and in consideration for the transfer of the jet aircraft by us to American, American will take the jet aircraft subject to, and we will be released from, indebtedness relating to such aircraft;
 
  •  effectiveness of the Air Services Agreement with American, with applicable terms governing our regional flight operations with American post spin-off, including rates charged for each aircraft type per block hour, per flight hour, per aircraft per day, per departure and for each day the agreement is in effect during the month, and which will identify costs as pass-through to American, absorbed by American, or controllable by us;
 
  •  effectiveness of the Ground Handling Agreement with American which will govern the ground handling services we provide for American, including the rates charged per handled departure on an airport-by-airport basis and the airports at which we will provide such services;
 
  •  effectiveness of the Transition Services Agreement and Information Technology Transition Services Agreement which will provide for certain administrative support services and information technology services to be provided for us by American. We do not expect the costs incurred under these agreements to be materially different from those American previously charged us for these services; and
 
  •  prior to or contemporaneously with the spin-off pursuant to the Separation and Distribution Agreement, (i) we expect AMR to make a capital contribution to us (currently contemplated to be $50 million in cash), (ii) American or AMR will agree to be responsible for, and we will be released from, certain other payables, workers’ compensation liabilities and accrued interest (totaling approximately $50 million at June 30, 2011) that we previously incurred on their behalf; and (iii) the recapitalization in which our common stock held by AMR will be converted into approximately [•] shares of common stock of Eagle.
 
These agreements between us and AMR and American are more fully described in “Agreements with AMR and Its Affiliates.”
 
We prepared the unaudited pro forma consolidated balance sheet as of June 30, 2011, as if the reorganization, the spin-off, the execution of the related agreements and the consummation of the transactions described above occurred on June 30, 2011. We prepared the unaudited pro forma consolidated statements of income for the year ended December 31, 2010 and the six months ended June 30, 2011, as if the reorganization, the spin-off, the execution of the related agreements and the consummation of the transactions described above occurred on January 1, 2010. We based the pro forma adjustments on the best information available and assumptions that we believe are reasonable given the information available; however, such


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adjustments are subject to change based upon the finalization of the terms of the separation and the underlying separation agreements.
 
Our business is subject to significant seasonality. In addition, our results of operations are impacted by our operating metrics — namely block hours, flight hours, aircraft days, aircraft departures and handled departures. To the extent these operating metrics, or the mix of regional jet and turbo-prop aircraft we fly differ in the future from historical periods, our results of operations will be impacted. Accordingly, our results of operations, and therefore our pro forma results of operations, for the six months ended June 30, 2011 may not be indicative of the results of operations for the year ending December 31, 2011.
 
We expect to experience certain incremental cost increases and decreases as an independent, publicly-traded company. For example, AMR currently provides many corporate overhead functions on our behalf, such as treasury, tax, accounting, legal, internal audit, human resources, investor relations, general management, real estate, insurance, risk management, information technology and employee benefit arrangements, and our historical consolidated financial statements include allocations of corporate overhead expenses from AMR related to these items. While we believe the assumptions and methodologies underlying the allocation of these costs from AMR are reasonable, these costs may not be representative of the future costs we will incur as an independent, publicly-traded company, including costs related to compliance with disclosure controls and procedures and internal control over financial reporting requirements under SOX, corporate governance matters and public reporting. We have not reflected the annual costs associated with replacing these functions because they are not reasonably estimable and factually supportable at this time.
 
The unaudited pro forma financial information is for illustrative and information purposes only and is not intended to represent or be indicative of what our financial position or results of operations would have been had the transactions contemplated by the separation and distribution and certain other transactions occurred on the dates indicated. The unaudited pro forma financial information also should not be considered representative of our financial position, and you should not rely upon the financial information presented below as a representation of our future performance.
 
Eagle will incur certain nonrecurring charges in connection with the spin-off, such as financial, legal, tax, accounting and other advisory fees, taxes (non-income) and regulatory fees, and may also incur costs that are expected to have a future benefit. At this time, we cannot estimate the total non-recurring separation charges that we will incur.
 
The number of shares used to compute pro forma basic earnings per share is [•], which is the number of shares of our common stock we estimate will be outstanding on the distribution date. Our estimate is based on the number of shares of AMR’s common stock outstanding on [•], 2011 and a distribution ratio of one share of our common stock for every [•] shares of AMR’s common stock outstanding. We expect our par value per share to change from $1.00 per share to $0.01 per share following the distribution. The number of shares used to compute pro forma diluted earnings per share is based on the number of shares of our common stock assumed to be outstanding on the distribution date, plus the estimated potential dilution that could have occurred on [•], 2011, if share-based awards granted under AMR’s equity-based compensation arrangements were exercised or converted into shares of our common stock. This calculation may not be indicative of the actual dilutive effect that would result from the conversion of AMR’s equity-based compensation arrangements into Eagle’s equity-based compensation arrangements or the effect of any future grant of new equity-based awards prior to the distribution date.


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Unaudited Pro Forma Balance Sheet
June 30, 2011
($ in thousands, except share amounts)
 
                         
          Pro Forma
       
    Historical     Adjustments     Pro Forma  
 
Assets
                       
Current Assets
                       
Cash and cash equivalents
  $ 5,092       47,800  (a)     52,892  
Receivables, net
    9,697       (2,000 )(b)     7,697  
Insurance receivables
    1,583             1,583  
Inventories, net
    45,462       (9,700 )(b)     35,762  
Deferred income taxes
    14,878       (4,000 )(e)     10,878  
Prepaid and other current assets
    18,688       (15,500 )(b)        
              (1,000 )(d)     2,188  
                         
Total current assets
    95,400       15,600       111,000  
Equipment and Property
                       
Aircraft and rotable spares, at cost
    3,729,273       (3,486,500 )(c)     242,773  
Less accumulated depreciation
    1,180,716       (1,073,300 )(c)     107,416  
                         
      2,548,557       (2,413,200 )     135,357  
Other equipment and property, at cost
    152,842       (30,400 )(c)     122,442  
Less accumulated depreciation
    124,819       (23,800 )(c)     101,019  
                         
      28,023       (6,600 )     21,423  
Equipment and Property Under Capital Leases
                       
Ground equipment, at cost
    676             676  
Less accumulated depreciation
    115             115  
                         
      561             561  
Airport Operating Rights
                       
Airport operating rights, at cost
    67,872       (67,872 )(a)      
Less accumulated amortization
    56,438       (56,438 )(a)      
                         
      11,434       (11,434 )      
Other Assets
                       
Deferred parts credits
    2,878             2,878  
Notes receivable
    5,434             5,434  
Debt issuance costs, net of amortization
    7,376       (7,376 )(c)      
Funds due from AMR affiliates
    293,509       (293,509 )(c)      
Deferred income taxes
          176,239  (e)     176,239  
Other assets
    9,263       (900 )(b)     8,363  
                         
Total other assets
    318,460       (125,546 )     192,914  
                         
Total assets
  $ 3,002,435       (2,541,180 )     461,255  
                         
Current Liabilities
                       
Accounts payable
  $ 62,537       (4,000 )(a)        
              (2,300 )(b)        
              (2,000 )(d)     54,237  
Accrued salaries and wages
    38,909       1,100  (a)     40,009  
Accrued interest
    16,508       (16,508 )(c)      
Accrued workers’ compensation
    24,059       (24,059 )(a)      
Other accrued liabilities
    41,569       (1,100 )(a)     40,469  
Current maturities of long-term debt
    279,717       (279,717 )(c)      
Current obligations under capital lease
    228             228  
                         
Total current liabilities
    463,527       (328,584 )     134,943  
Long-term debt, less current maturities
    1,909,474       (1,909,474 )(c)      
Obligations under capital leases, less current obligations
    153             153  
Other Liabilities and Credits
                       
Deferred income taxes
    228,354       (228,354 )(e)      
Other liabilities
    34,524       (32,500 )(a)     2,024  
                         
Total other liabilities
    262,878       (260,854 )     2,024  
Stockholder’s Equity
                       
Common stock — par value $1.00 per share, 1,000 shares outstanding, historical; par value $0.01 per share, [•] shares outstanding, pro forma
    1             1  
Additional paid-in capital
    315,589       (42,268 )(g)     273,321  
Retained earnings
    50,813             50,813  
                         
Total stockholder’s equity
    366,403       (42,268 )     324,135  
                         
Total liabilities and stockholder’s equity
  $ 3,002,435       (2,541,180 )     461,255  
                         


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Unaudited Pro Forma Consolidated Statement of Income
Six Months Ended June 30, 2011
($ in thousands)
 
                         
          Pro Forma
       
    Historical     Adjustments     Pro Forma  
 
Operating Revenues
                       
Regional air services
  $ 1,126,728       (2,200 )(a)        
              (480,900 )(b)        
              (125,400 )(c)     518,228  
Ground handling services
    165,000       (33,400 )(d)     131,600  
                         
Total operating revenues
    1,291,728       (641,900 )     649,828  
                         
Operating Expenses
                       
Aircraft fuel
    455,713       (455,713 )(b)      
Wages, salaries and benefits
    327,094       (400 )(d)     326,694  
Maintenance, materials and repairs
    138,632             138,632  
Depreciation and amortization
    84,471       (74,200 )(c)     8,871  
              (1,400 )(a)        
Other rentals and landing fees
    67,174       (12,900 )(d)     54,274  
Passenger handling
    75,162       (13,300 )(d)        
              (4,700 )(b)     57,162  
Flight equipment rentals
    14,643       (14,643 )(b)      
Other operating expenses
    60,963       (2,600 )(d)        
              900  (b)     59,263  
                         
Total operating expenses
    1,223,852       (578,956 )     644,896  
                         
Operating income
    67,876       (62,944 )     4,932  
                         
Other Income (Expense)
                       
Interest income from affiliates, net
    733       (733 )(a)      
Interest income
    520       400  (a)     920  
Interest expense
    (51,625 )     51,625  (c)      
Other — net
    (448 )     448  (c)      
                         
      (50,820 )     51,740       920  
                         
Income before income taxes
    17,056       (11,204 )     5,852  
Income tax expense
    7,145       (4,687 )(f)     2,458  
                         
Net income
  $ 9,911       (6,517 )     3,394  
                         


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Unaudited Pro Forma Consolidated Statement of Income
Year Ended December 31, 2010
($ in thousands)
 
                         
          Pro Forma
       
    Historical     Adjustments     Pro Forma  
 
Operating Revenues
                       
Regional air services
  $ 1,938,067       (4,400 )(a)        
              (723,100 )(b)        
              (231,500 )(c)     979,067  
Ground handling services
    327,914       (66,900 )(d)     261,014  
                         
Total operating revenues
    2,265,981       (1,025,900 )     1,240,081  
                         
Operating Expenses
                       
Aircraft fuel
    669,607       (669,607 )(b)      
Wages, salaries and benefits
    609,550       (500 )(d)     609,050  
Maintenance, materials and repairs
    264,846             264,846  
Depreciation and amortization
    153,251       (133,100 )(c)     17,451  
              (2,700 )(a)        
Other rentals and landing fees
    133,751       (25,200 )(d)     108,551  
Passenger handling
    132,526       (23,300 )(d)        
              (11,800 )(b)     97,426  
Flight equipment rentals
    29,022       (29,022 )(b)      
Other operating expenses
    104,019       (4,600 )(d)        
              1,600  (b)     101,019  
                         
Total operating expenses
    2,096,572       (898,229 )     1,198,343  
Operating income
    169,409       (127,671 )     41,738  
                         
Other Income (Expense)
                       
Interest income from affiliates, net
    1,221       (1,221 )(a)      
Interest income
    917       600  (a)     1,517  
Interest expense
    (99,497 )     99,400  (c)     (97 )
Other — net
    (794 )     700  (c)     (94 )
                         
      (98,153 )     99,479       1,326  
                         
Income before income taxes
    71,256       (28,192 )     43,064  
Income tax expense
    30,354       (12,009 )(f)     18,345  
                         
Net income
  $ 40,902       (16,183 )     24,719  
                         


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Notes to the Unaudited Pro Forma Condensed Balance Sheet and Statements of Operations
 
(a) Prior to the spin-off, we will execute a Separation and Distribution Agreement which will set forth our agreements with AMR regarding the principal actions needed to be taken in connection with our separation from AMR. It will also set forth other agreements that govern certain aspects of our relationship with AMR following the separation. This adjustment reflects an assumed $50 million cash contribution expected to be made by AMR prior to or contemporaneously with the spin-off, net of amounts that will be returned to American associated with our domestic operations, and the reallocation to AMR or American of certain payables, workers’ compensation liabilities and accrued interest (totaling approximately $50 million at June 30, 2011) that we previously incurred on their behalf.
 
(b) Prior to the spin-off, we will execute the Air Services Agreement containing terms which will govern how American will compensate us. As more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” certain costs that were previously passed through to American will now be absorbed by American. The most significant changes in pass-through expenses include changing fuel from a pass through expense to an absorbed expense.
 
(c) Prior to the spin-off, we will execute a Purchase Agreement pursuant to which we will transfer all of our jet aircraft, certain fixed assets (including our leasehold improvements) related to our regional flight operations and ground handling services, and certain intercompany receivables to American. In consideration for the transfer of the jet aircraft by us to American, American will take the jet aircraft subject to, and we will be released from, indebtedness related to the aircraft, on which AMR is already the guarantor.
 
(d) We will enter into the Ground Handling Agreement, effective as of the spin-off, which will define the rates charged per handled departure on an airport-by-airport basis and the airports at which we will provide such services. Adjustments reflect elimination of the revenues and related costs primarily due to stations that will not be directly served by us.
 
(e) This adjustment reflects the deferred tax attributes related to the adjustments identified in notes (a) — (d) above. Additionally, in connection with the spin-off, we will be allocated a portion of the AMR consolidated NOL, which we believe will be approximately $800 million on a gross basis and $280 million on a tax-effected basis. This amount differs from the historical NOL of approximately $556 million which was calculated in accordance with our current Tax Sharing Agreement (the “Tax Sharing Agreement”) with AMR, which will be replaced by the Tax Matters Agreement following the spin-off. We provide a valuation allowance for deferred tax assets when it is more likely than not that some portion or all of our deferred tax assets will not be realized. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Based on projections of future income under the terms of the Air Services Agreement and Ground Handling Agreement with American, we expect to record a valuation allowance of $132.5 million for the allocated NOLs.


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The following summarizes the impact of the tax pro forma adjustments reflected (in thousands):
 
         
Adjustment of deferred tax attributes for assets and liabilities transferred to American, as referenced in agreements above, primarily related to elimination of deferred tax liabilities due to the transfer of the aircraft
  $ 809,280  
Elimination of historical NOL determined on basis of Tax Sharing Agreement with AMR
    (556,187 )
Allocation of AMR NOL
    280,000  
Valuation allowance recorded on allocated NOL
    (132,500 )
         
Total increase to net deferred tax assets
  $ 400,593  
         
Total increase allocated to balance sheet as follows:
       
Adjustment to reduce current deferred income tax assets
  $ (4,000 )
Adjustment to increase non-current deferred income tax assets
    176,239  
Adjustment to reduce non-current deferred income tax liabilities
  $ 228,354  
         
Total tax pro forma adjustments
  $ 400,593  
         
 
(f) Adjustment reflects the tax impact of the pro forma adjustments calculated at our historical effective rate for the periods presented.
 
(g) Adjustment to decrease equity due to the adjustments identified in (a) — (e) above as summarized below:
 
         
Adjustments to increase equity from Separation and Distribution Agreement referenced in(a)
  $ 97,007  
Adjustments to decrease equity from Air Services Agreement referenced in(b)
    (25,702 )
Adjustments to decrease equity from Purchase Agreement referenced in(c)
    (515,238 )
Adjustments to increase equity from Ground Handling Agreement referenced in(d)
    1,072  
Adjustments to increase equity due to tax effects of above adjustments referenced in(e)
    400,593  
         
Net decrease to equity
  $ (42,268 )
         


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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion of our results of operations and financial condition together with our audited and unaudited historical and unaudited pro forma consolidated financial statements and the notes thereto included elsewhere in this Information Statement as well as the discussion in the section of this Information Statement entitled “Business.” This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Information Statement entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”
 
Overview
 
Our Business
 
We are a leading regional airline that provides both regional flight operations and ground handling services throughout North America. We provide regional flight operations to American and ground handling services to passenger airlines, including American and 13 other airlines. At July 1, 2011, we had an active regional aircraft fleet of 281 aircraft providing 1,653 daily regional flight departures throughout the U.S., the Bahamas, the Caribbean, Mexico and Canada, and provided ground handling services for 1,619 daily departures at more than 100 airports across the U.S., the Bahamas, the Caribbean and Canada.
 
Outlook
 
Our strategy for our regional air services business is to increase our business by seeking additional flying opportunities from other mainline airlines, while maintaining our business with American. We believe our ability to obtain profitable additional flying opportunities will be largely dependent on our costs being comparable, and our service quality being consistent, with those of other regional airlines.
 
We believe our overhead expenses and service quality are generally competitive with those of other regional airlines. Although we believe our labor contracts are similar to those of our competitors, we believe that the average seniority of our employees represented by collective bargaining groups is substantially higher than that of many of our regional airline competitors. This is primarily because we have grown more slowly than those competitors, which we believe is a result of our having been wholly-owned by American and thus unable to seek business from other airlines, and of our having had a larger regional aircraft fleet for a longer period of time than many of our competitors. Correspondingly, our average labor costs are higher than those of some of our competitors. For our airline business to remain profitable, we believe we must bring our average labor costs in line with those of our regional competitors. We are seeking to accomplish this by growing our business and by collaborating with representatives of our collective bargaining groups to find ways to improve our productivity and lower our average employee seniority, which in turn should improve our labor cost position.
 
Over the next several years, we expect multiple existing regional air service contracts with airlines other than American to come up for competitive bid. In addition, we expect other regional flight opportunities to arise over the next several years as mainline carriers continue to seek lower cost, more efficient ways to feed passenger traffic into their existing air networks. We intend to compete vigorously for these opportunities.
 
Our success in growing our business will also depend on our ability to maintain our business with American. Under the Air Services Agreement, American will have the right to withdraw a specified number of Super ATR turbo-prop aircraft each year beginning in 2012 and a specified number of jet aircraft each year beginning in 2014. While we believe we have a strong relationship with American and American would incur substantial costs if it were to switch most of its regional feed to another regional airline in a short period of time, one of American’s stated objectives is to reduce its dependence on us over time through diversification of its regional feed, either by moving some of our business to other regional airlines or, if American’s regional


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business is growing, by engaging other regional airlines to provide this additional regional feed. Although we intend to compete vigorously for American’s regional feed business, we may not be able to earn or replace that business. If we lose existing business from American, we will likely need to obtain additional business from other airlines to grow our business, lower our average employee seniority and manage our costs.
 
With regard to our ground handling services business, we believe our costs are in-line with those of other ground handling service providers. We plan to continue to pursue growth in this business by offering additional services at the airports where we have a presence and selectively seeking business in airports where we have no presence today.
 
Our Agreements with American
 
Air Services.  For the six months ended June 30, 2011, all of our regional air services revenues were generated from American. We currently operate flights on behalf of American pursuant to an air services agreement (the “Historical ASA”) under which American controls and is responsible for our scheduling, ticket pricing and seat inventories for these flights. American is entitled to all ticket, cargo and ancillary revenues associated with the operation of the aircraft and is responsible for all revenue-related expenses, including commissions, reservations and passenger ticket processing expenses. The contract provides for us to be paid aircraft-specific rates based on aircraft days, block hours, flight hours, aircraft departures and total days. Under the Historical ASA, American reimburses us for our actual costs without mark-up for jet fuel, into-plane fueling, insurance, landing fees, aircraft ownership and rent, air traffic control user fees, aircraft property taxes and certain engine maintenance costs. In addition, American pays for rent at hub stations directly and therefore these costs are not reflected in our consolidated statement of operations. Prior to the spin-off, we will enter into the Air Services Agreement, which will replace the Historical ASA. However, the terms of the Historical ASA will remain in effect until completion of the spin-off.
 
Following the spin-off, we will initially derive all of our regional air services revenues under the Air Services Agreement. See “Agreements with AMR and Its Affiliates.” Under the Air Services Agreement, we will operate 245 regional jet aircraft and 36 Super ATR turbo-prop aircraft on behalf of American. The term of the Air Services Agreement will be nine years from the distribution date, although American will have the right to withdraw aircraft from the Air Services Agreement upon the occurrence of certain events. In addition, American will have the right to withdraw a certain number of Super ATR turbo-prop aircraft each year beginning in 2012 and a certain number of jet aircraft each year beginning in 2014. Consistent with the Historical ASA, American will control and be responsible for our scheduling, ticket pricing and seat inventories and will be entitled to all ticket, cargo and ancillary revenues associated with the operation of our aircraft. The number of aircraft we operate and their utilization rates will have the largest impact on our revenues, which will be dependent on American’s scheduling of flights, subject to payment of certain amounts based on minimum utilization.
 
Under the Air Services Agreement, following the spin-off, American will compensate us on a monthly basis for the regional flight operations we provide in accordance with pre-set rates. These rates will consist of fixed-fees per block hour, per flight hour, per aircraft per day, per departure and for each day the agreement is in effect during the month for each aircraft type. We will also be able to earn certain incentive compensation based on established periodic performance targets set by American and will be subject to penalties based on whether our monthly controllable completion rate falls above or below certain established targets. The pre-set rates will remain in place throughout the nine-year term of the agreement, subject to an automatic annual increase based on the consumer price index, adjusted to exclude the impact of food and energy, and subject to a reset to market rates for jet aircraft on the fourth anniversary of the distribution.
 
Under both the Historical ASA and the Air Services Agreement, some of our costs are reimbursed by American with no mark-up, referred to as “pass-through costs,” and some of our costs are paid directly by American, referred to as “absorbed costs.” Because American reimburses us for pass-through costs, our revenue increases by the amount of the pass-through costs, but the revenue is completely offset by the amount of the pass-through costs. Because American pays absorbed costs directly, absorbed costs do not have any impact on our consolidated financial statements. As a result, our net income is not affected by pass-through


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costs or absorbed costs and we do not have any financial risk associated with increases in these costs. Our “controllable costs,” such as our corporate overhead, wages, employee benefits and certain maintenance expenses, are not reimbursed or paid by American. As a result, our ability to manage and control our controllable costs will have a significant impact on our net income.
 
The classification of costs as either pass-through or absorbed costs will be different under the Air Services Agreement than under the Historical ASA. Accordingly, our revenues and expenses will change significantly following the spin-off due to these contractual changes. The following chart shows the classification of our most significant costs as controllable, pass-through or absorbed under the Historical ASA and the Air Services Agreement.
 
         
        Air Services
Cost
  Historical ASA   Agreement
 
Aircraft fuel
  Pass-Through   Absorbed
Landing fees
  Pass-Through   Pass-Through
Passenger facilities rent — American non-hub airports
  Controllable   Absorbed
Passenger facilities rent — American hub airports
  Absorbed   Absorbed
Hull and liability insurance
  Pass-Through   Pass-Through
Aircraft ownership
  Pass-Through   Absorbed(1)
Aircraft property taxes
  Pass-Through   Pass-Through
TSA fees/charges
  Absorbed   Pass-Through
 
 
(1) Prior to the spin-off, we will transfer all of our jet aircraft to American and will lease them from American for a nominal monthly fee.
 
Under the Historical ASA, maintenance, materials and repairs are generally treated as controllable costs, but certain costs are passed-thorough to American for reimbursement. Following the spin-off, maintenance, materials and repair will continue to include controllable and pass-through costs, but we expect a higher proportion of the costs will be treated as controllable costs and not passed through to American.
 
Ground Handling.  For the six months ended June 30, 2011, approximately 95% of our ground handling services revenues were generated from American. Under our current ground handling agreements with American (collectively, the “Historical GHA”), American pays us a fixed rate per scheduled aircraft departure on an airport by airport basis. At July 1, 2011, we provided ground handling services for 1,619 daily departures at more than 100 airports across the U.S., the Bahamas, the Caribbean and Canada. Following the spin-off, we will provide ground handling services for American’s flight operations at 106 airport locations pursuant to the Ground Handling Agreement. The Ground Handling Agreement will specify the services we provide and the rates we are paid on an airport-by-airport basis. Under the Ground Handling Agreement, American will compensate us through a pre-set rate per actual arrival and subsequent departure of a handled aircraft at a particular airport, subject to certain adjustments. In addition, American will reimburse us without mark-up for some of our costs, such as catering, de-icing fluids and other supplies provided by us, third party services and certain taxes and fees.
 
Results of Operations
 
Basis of Presentation
 
The historical consolidated financial statements included in this Information Statement do not reflect what our financial position, results of operations and cash flows would have been if we were a stand-alone entity during the periods presented. These consolidated financial statements include all of our assets, liabilities, revenues, expenses and cash flows as well as those of our subsidiaries, American Eagle and Executive, for each of the periods presented. For each of the periods presented, we were a wholly-owned subsidiary of AMR.
 
In connection with the spin-off, we will enter into transactions with AMR and American that either have not existed historically or that are on terms different than those existing prior to the spin-off. See “Agreements with AMR and Its Affiliates” for more detail. Our historical financial information described below does not reflect the


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effects of such transactions. In addition, our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from AMR, including changes in the financing, operations, cost structure and personnel needs of our business. Further, the historical financial statements include allocations of certain AMR corporate expenses related to various administrative services that have historically been provided to us by AMR. While we believe the assumptions and methodologies underlying the allocation of these general corporate expenses were reasonable, they may not be indicative of the actual level of expense that we would have incurred if we had been operating as an independent, publicly-traded company or of the costs we expect to incur in the future. Accordingly, the historical financial information described below will not reflect our future financial position, results of operations and cash flows or what our financial position, results of operations and cash flows would have been if we were an independent, publicly-traded company during the periods presented, nor does it represent our expected financial condition following the spin-off.
 
Because some of our expenses, as described above in “— Overview — Our Agreements with American” are passed-through to American, we believe the most meaningful comparison of our revenues from period-to-period is on a “controllable regional air services revenues” basis. This basis presents our regional air services revenues, less pass-through expenses. We have provided this comparison in several places below in our discussion of our period-to-period comparison of financial results.
 
Revenues
 
In our historical statements of income, regional air services revenues have been derived solely from our Historical ASA with American and ground handling revenues have been derived from our Historical GHA with American and our ground handling agreements with third parties.
 
Operating Expenses
 
Aircraft fuel.  This expense includes the cost of jet fuel, associated taxes and into-plane fees and hedging gains or losses allocated to us by American. Currently, aircraft fuel expense is passed through to American. Following the spin-off, American will absorb the cost of jet fuel and, therefore, we do not expect to have significant jet fuel expense.
 
Wages, salaries and benefits.  This expense includes employee salaries, wages and benefits, as well as payroll taxes and the allocated cost of employee incentive plan awards. These expenses fluctuate based on headcount and changes in wage rates for contract and non-contract employees.
 
Maintenance, materials and repairs.  Maintenance-related expenses include all parts and labor related to maintaining our aircraft. We have engine service agreements with third party vendors to provide engine overhaul services for the regional jet aircraft that we operate. Under the terms of the agreements, we pay a set dollar amount per flight hour or cycle on a monthly basis and the third party vendor assumes the responsibility to overhaul the engines at no additional cost to us, subject to certain specified exclusions. Maintenance costs under these contracts are recognized when the flight hour or cycle is flown pursuant to the terms of the contract. The costs of maintenance for airframe and avionics components, landing gear and normal recurring maintenance are expensed as incurred.
 
Depreciation and amortization.  These expenses relate to depreciation of our aircraft and other property and amortization of our aircraft operating rights. Prior to the spin-off, we will transfer all of our regional jet aircraft and certain other assets to American, and our depreciation and amortization expense will be significantly reduced.
 
Other rentals and landing fees.  These costs include rent at non-hub airport locations and landing fees. Currently, passenger facilities rent at non-hub airport locations is a controllable cost and paid by us, and passenger facilities rent at American’s hub locations is absorbed by American. Following the spin-off, American will absorb the cost of passenger facilities rent at all airport locations where permitted.
 
Passenger handling.  These expenses relate to servicing passengers through both our air services and ground handling agreements with American. These costs include expenses associated with a passenger’s interrupted trip, aircraft servicing and other expenses.
 
Flight equipment rentals.  These expenses relate to aircraft rent paid to American for our Super ATR 72 aircraft. Prior to the spin-off, we will lease all of our operating aircraft from American for a nominal amount


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per month. As a result, we expect our expense for flight equipment rentals will not be material immediately after the spin-off.
 
Other operating expenses.  This expense primarily includes costs for data processing, management services, insurance and certain non-income taxes.
 
Seasonality
 
Our results of operations for any interim period are not necessarily indicative of those for the entire year, as we are subject to seasonal fluctuations and general economic conditions that can impact the timing of business travel. Historically, our block hours are lower in the first and second quarters as compared to the third and fourth quarters due to these seasonal patterns. However, these trends may not continue in the future.
 
Consolidated Results
 
The following tables set forth on a historical basis certain items related to operations as a percentage of revenues for the periods indicated (dollars in thousands):
 
                                                 
    Year Ended December 31,  
    2010     2009     2008  
          % of
          % of
          % of
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues  
 
Operating Revenues
                                               
Regional air services
  $ 1,938,067       85.5 %   $ 1,808,207       85.4 %   $ 2,243,368       88.0 %
Ground handling services
    327,914       14.5       309,081       14.6       306,536       12.0  
                                                 
Total operating revenues
    2,265,981       100.0       2,117,288       100.0       2,549,904       100.0  
                                                 
Operating Expenses
                                               
Aircraft fuel
    669,607       29.6       538,004       25.4       859,797       33.7  
Wages, salaries and benefits
    609,550       26.9       580,426       27.4       588,412       23.1  
Maintenance, materials and repairs
    264,846       11.7       255,198       12.1       254,798       10.0  
Depreciation and amortization
    153,251       6.8       149,689       7.1       184,044       7.2  
Other rentals and landing fees
    133,751       5.9       123,194       5.8       117,558       4.6  
Passenger handling
    132,526       5.9       128,152       6.1       166,683       6.5  
Special charges
                42,162       2.0       115,332       4.5  
Flight equipment rentals
    29,022       1.1       29,567       1.3       8,415       0.3  
Other operating expenses
    104,019       4.6       108,273       5.1       115,218       4.6  
                                                 
Total operating expenses
    2,096,572       92.5       1,954,665       92.3       2,410,257       94.5  
                                                 
Operating income
    169,409       7.5       162,623       7.7       139,647       5.5  
                                                 
Other Income (Expense)
                                               
Interest income from affiliates, net
    1,221       0.1       5,458       0.3       19,190       0.8  
Interest income
    917             103             158        
Interest expense
    (99,497 )     (4.4 )     (111,230 )     (5.3 )     (124,778 )     (4.9 )
Other— net
    (794 )           (774 )           (3,428 )     (0.2 )
                                                 
      (98,153 )     (4.3 )     (106,443 )     (5.0 )     (108,858 )     (4.3 )
                                                 
Income before income taxes
    71,256       3.2       56,180       2.7       30,789       1.2  
Income taxes
    30,354       1.4       15,884       0.8       9,988       0.4  
                                                 
Net income
  $ 40,902       1.8 %   $ 40,296       1.9 %   $ 20,801       0.8 %
                                                 
 


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    Six Months Ended June 30,  
    2011     2010  
          % of
          % of
 
    Amount     Revenues     Amount     Revenues  
 
Operating Revenues
                               
Regional air services
  $ 1,126,728       87.2 %   $ 934,012       85.2 %
Ground handling services
    165,000       12.8       162,329       14.8  
                                 
Total operating revenues
    1,291,728       100.0       1,096,341       100.0  
                                 
Operating Expenses
                               
Aircraft fuel
    455,713       35.3       315,290       28.8  
Wages, salaries and benefits
    327,094       25.3       304,661       27.8  
Maintenance, materials and repairs
    138,632       10.7       129,856       11.8  
Depreciation and amortization
    84,471       6.5       74,314       6.8  
Other rentals and landing fees
    67,174       5.2       67,197       6.1  
Passenger handling
    75,162       5.8       64,145       5.9  
Special charges
                       
Flight equipment rentals
    14,643       1.1       14,448       1.3  
Other operating expenses
    60,963       4.8       56,248       5.1  
                                 
Total operating expenses
    1,223,852       94.7       1,026,159       93.6  
                                 
Operating income
    67,876       5.3       70,182       6.4  
                                 
Other Income (Expense)
                               
Interest income from affiliates, net
    733       0.1       459        
Interest income
    520             36        
Interest expense
    (51,625 )     (4.0 )     (49,396 )     (4.5 )
Other— net
    (448 )           (351 )      
                                 
      (50,820 )     (3.9 )     (49,252 )     (4.5 )
                                 
Income before income taxes
    17,056       1.4       20,930       1.9  
Income taxes
    7,145       0.6       8,801       0.8  
                                 
Net income
  $ 9,911       0.8 %   $ 12,129       1.1 %
                                 
 
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
 
Operating statistics.  The following table sets forth our operating statistics and the associated percentage change for the periods identified below:
 
                         
    Six Months Ended June 30,
    2011   2010   % Change
 
Block hours
    435,190       397,818       9.4 %
Flight hours
    332,394       300,483       10.6 %
Aircraft departures
    267,449       265,491       0.7 %
Aircraft days
    50,910       46,882       8.6 %
Handled departures
    293,039       286,393       2.3 %
 
Total operating revenues.  Total operating revenues increased $195.4 million, or 17.8%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. These revenues are comprised of regional air services revenues and ground handling revenues.
 
Regional air services revenues.  Regional air services revenues increased $192.7 million, or 20.6%, from $934.0 million to $1,126.7 million, during the six months ended June 30, 2011 as compared to the six months

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ended June 30, 2010. The following table sets forth our regional air services revenues for these periods on a controllable regional air services basis (in thousands).
 
                         
    Six Months Ended June 30,  
    2011     2010     % Change  
 
Regional air services revenues
  $ 1,126,728     $ 934,012       20.6 %
Less: aircraft fuel pass-through expense
    (455,713 )     (315,290 )        
Less: other pass-through expenses
    (238,656 )     (226,218 )        
                         
Controllable regional air services revenues
  $ 432,359     $ 392,504       10.2 %
 
Controllable regional air service revenues increased $39.9 million for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase was primarily due to a 9.4%, 10.6%, and 8.6% increase in block hours, flight hours and aircraft days, respectively, associated with the acquisition of additional aircraft between June 2010 and April 2011.
 
Ground handling services revenues.  Ground handling services revenues increased $2.7 million, or 1.6%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase was primarily related to a 2.3% increase in handled departures due to an increase in the number of aircraft.
 
Total operating expenses.  The following table presents our operating expenses, including expenses passed through to American.
 
                         
    Six Months Ended June 30,  
    2011     2010     % Change  
 
Operating Expenses
                       
Aircraft fuel
  $ 455,713     $ 315,290       44.5 %
Wages, salaries and benefits
    327,094       304,661       7.4  
Maintenance, materials and repairs
    138,632       129,856       6.8  
Depreciation and amortization
    84,471       74,314       13.7  
Other rentals and landing fees
    67,174       67,197       0.0  
Passenger handling
    75,162       64,145       17.2  
Flight equipment rentals
    14,643       14,448       1.3  
Other operating expenses
    60,963       56,248       8.4  
                         
Total operating expenses
  $ 1,223,852     $ 1,026,159       19.3 %
 
Aircraft fuel.  Aircraft fuel expense increased by $140.4 million, or 44.5%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase was the result of an overall increase in the average price of jet fuel as well as a 13% increase in the number of gallons of jet fuel used, resulting from increased block hours. Our average jet fuel costs were $3.01 per gallon during the six months ended June 30, 2011, as compared to $2.36 per gallon during the six months ended June 30, 2010. Jet fuel expense is net of hedging gains (losses) allocated to us by American, which amounted to a gain of $27.3 million and a loss of $12.3 million in the six months ended June 30, 2011 and 2010, respectively.
 
Wages, salaries and benefits.  Wages, salaries and benefits increased by $22.4 million, or 7.4%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase in wages, salaries and benefits was primarily due to increased employee hours resulting from the increase in block hours, aircraft days and handled departures associated with the additional aircraft for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010.
 
Maintenance, materials and repairs.  Maintenance, materials and repairs increased by $8.7 million, or 6.8%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase in maintenance, material and repairs was primarily due to additional aircraft in the fleet and timing of scheduled maintenance.


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Depreciation and amortization.  Depreciation and amortization expense increased by $10.2 million, or 13.7%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase in depreciation and amortization was primarily due to the acquisition of additional aircraft between June 2010 and April 2011.
 
Passenger handling.  Passenger handling expense increased by $11.0 million, or 17.2%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase was primarily due to the 2.3% increase in handled departures and increase in travel and incidental expenses associated with training of new crew for the additional aircraft.
 
Other income (expense).  Other income (expense) consists of interest income, interest expense and other miscellaneous expenses. Currently, all transactions with affiliates are recorded on our consolidated balance sheet in “Funds due from AMR affiliates.” Interest is earned or charged on these receivables or payables at the rate of return American earns on its short-term investment portfolio. Net interest income from affiliates increased $0.3 million. Interest expense increased $2.2 million, or 4.5%, due to higher levels of aircraft-related debt in 2011 as compared to 2010.
 
Income tax provision.  Our effective tax rate was 42% for both the six months ended June 30, 2011 and 2010. The effective rate differs from the statutory rate primarily due to state income taxes and non-deductible expenses, consisting primarily of a portion of crew meals expense.
 
2010 Compared to 2009
 
Operating statistics.  The following table sets forth our operating statistics and the associated percentage change for the periods identified below:
 
                         
    Years Ended December 31,
    2010   2009   % Change
 
Block hours
    825,255       779,746       5.8 %
Flight hours
    628,203       586,188       7.2 %
Aircraft departures
    538,066       534,327       0.7 %
Aircraft days
    96,553       94,651       2.0 %
Handled departures
    578,322       557,260       3.8 %
 
Total operating revenues.  Total operating revenues increased $148.7 million, or 7.0%, during 2010 as compared to 2009. These revenues are comprised of our regional air services revenues and our ground handling revenues.
 
Regional air services revenues.  Regional air services revenues increased $129.9 million, or 7.2%, for 2010 as compared to 2009. The following table sets forth our regional air services revenues for these years on a controllable regional air services basis (in thousands).
 
                         
    Years Ended December 31,  
    2010     2009     % Change  
 
Regional air services revenues
  $ 1,938,067     $ 1,808,207       7.2 %
Less: aircraft fuel pass-through expense
    (669,607 )     (538,004 )        
Less: other pass-through expenses
    (454,004 )     (501,134 )        
                         
Controllable regional air services revenues
  $ 814,456     $ 769,069       5.9 %
 
Controllable regional air services revenues increased $45.4 million in 2010 as compared to 2009. The increase was due to a 5.8%, 7.2%, 2.0% and 0.7% increase in block hours, flight hours, aircraft days and departures, respectively, and an increase in our compensation rates. The increase in block hours and flight hours was due to the addition of new routes and new aircraft, as well as increased levels of service in certain domestic markets.


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Ground handling services revenues.  Ground handling services revenues increased $18.8 million, or 6.1%, during 2010 as compared to 2009. The increase was primarily related to an increase in handled departures associated with new business and additional services provided in 2010 as compared to 2009.
 
Total operating expenses.  The following table presents our operating expenses, including expenses passed-through to American (in thousands).
 
                         
    Years Ended December 31,  
    2010     2009     % Change  
 
Operating Expenses
                       
Aircraft fuel
  $ 669,607     $ 538,004       24.5 %
Wages, salaries and benefits
    609,550       580,426       5.0  
Maintenance, materials and repairs
    264,846       255,198       3.8  
Depreciation and amortization
    153,251       149,689       2.4  
Other rentals and landing fees
    133,751       123,194       8.6  
Passenger handling
    132,526       128,152       3.4  
Special charges
          42,162        
Flight equipment rentals
    29,022       29,567       (1.8 )
Other operating expenses
    104,019       108,273       (3.9 )
                         
Total operating expenses
  $ 2,096,572     $ 1,954,665       7.3 %
 
Aircraft fuel.  Aircraft fuel expense increased by $131.6 million, or 24.5%, for 2010 as compared to 2009. The increase was a result of an overall increase in the average price of jet fuel as well as an 8% increase in the number of gallons of jet fuel used, resulting from increased block hours. Our average jet fuel cost was $2.31 per gallon during 2010, as compared to $1.82 per gallon during 2009. Jet fuel expense is net of hedging gains (losses) allocated to us by American, which amounted to losses of $15.1 million and $59.9 million in 2010 and 2009, respectively.
 
Wages, salaries and benefits.  Wages, salaries and benefits increased by $29.1 million, or 5.0%, during 2010 as compared to 2009. The increase in wages, salaries and benefits was primarily due to increased employee hours resulting from increased block and flight hours in 2010 as compared to 2009.
 
Maintenance, materials and repairs.  Maintenance, materials and repairs increased by $9.6 million, or 3.8%, during 2010 as compared to 2009. The increase in maintenance, material and repairs was primarily due to increased overhaul repairs on ERJ-145 airframes and engines resulting from increased air services during 2010, as well as the addition of new CRJ-700 aircraft.
 
Depreciation and amortization.  Depreciation and amortization expense increased by $3.6 million, or 2.4%, during 2010 as compared to 2009. The increase in depreciation and amortization was primarily due to the addition of new aircraft.
 
Other rentals and landing fees.  Other rentals and landing fees increased by $10.6 million, or 8.6%, during 2010 as compared to the year ended December 31, 2009. The increase in other rentals and landing fees was primarily due to rate increases for landing fees in certain markets.
 
Passenger handling.  Passenger handling expense increased by $4.4 million, or 3.4%, during 2010 as compared to 2009. The increase was primarily due to the addition of ground handling services at 31 new stations in 2010 resulting in an increase in the number of handled departures.
 
Special charges.  In 2009, we concluded that the carrying value of our ERJ-135 aircraft exceeded their fair value and, as a result, recorded an impairment charge of $42.2 million and reflected this item as a special charge. There were no special charges in 2010.
 
Other income (expense).  Other income (expense) consists of interest income, interest expense and other miscellaneous expenses. Other expense decreased to $98.2 million for 2010 from $106.4 million for 2009, primarily due to reductions in net interest income from affiliates and interest expense. Currently, all


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transactions with affiliates are recorded in “Funds due from AMR affiliates.” Interest is earned or charged on these receivables or payables at the rate of return American earns on its short-term investment portfolio. Net interest income from affiliates decreased $4.2 million, or 77.6%, due to a decrease in short-term investment rates and as well as a decrease in the average balance of “Funds due from AMR affiliates” due to a dividend payment of $650.0 million to AMR in 2009. Interest expense decreased $11.7 million, or 10.5%, due to a decrease in average debt balances.
 
Income tax provision.  Our effective tax rate was 43% and 28% for the years ended December 31, 2010 and 2009, respectively. For 2010, the effective tax rate differed from the U.S. statutory rate due to state and foreign taxes and other non-deductible expenses. The effective tax rate was less than the U.S. statutory rate for 2009 due to a state deduction associated with dissolving one of our subsidiaries.
 
2009 Compared to 2008
 
Operating statistics.  The following table sets forth our operating statistics and the associated percentage change for the periods identified below:
 
                         
    Years Ended December 31,
    2009   2008   % Change
 
Block hours
    779,746       855,654       (8.9 )%
Flight hours
    586,188       637,622       (8.1 )%
Aircraft departures
    534,327       573,716       (6.9 )%
Aircraft days
    94,651       102,674       (7.8 )%
Handled departures
    557,260       565,934       (1.5 )%
 
Total operating revenues.  Total operating revenues decreased $432.6 million, or 17.0%, during 2009 as compared to 2008.
 
Regional air services revenues.  Regional air services revenues decreased $435.2 million, or 19.4%, for 2009 as compared to 2008. The following table sets forth our regional air services revenues for these years on a controllable regional air services basis (in thousands).
 
                         
    Years Ended December 31,  
    2009     2008     % Change  
 
Regional air services revenues
  $ 1,808,207     $ 2,243,368       (19.4 )%
Less: Aircraft fuel pass-through
    (538,004 )     (859,797 )        
Less: Other pass-through
    (501,134 )     (532,706 )        
                         
Controllable regional air services revenues
  $ 769,069     $ 850,865       (9.6 )%
 
Controllable regional air service revenues decreased $81.8 million, or 9.6%, for 2009 as compared to 2008. The decrease was due to a 8.9%, 8.1%, 7.8% and 6.9% decrease in block hours, flight hours, aircraft days and departures, respectively, which was partially offset by an increase in our rates of compensation. The decrease in block hours, aircraft days and departures was primarily a result of decreased utilization per aircraft and the grounding of our Saab 340B fleet due to overall weak economic conditions.
 
Ground handling services revenues.  Ground handling services revenues increased $2.5 million, or 0.8%, during 2009 as compared to 2008.


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Total operating expenses.  The following table presents our operating expenses, including expenses passed through to American (in thousands).
 
                         
    Years Ended December 31,
    2009   2008   % Change
 
Operating Expenses
                       
Aircraft fuel
  $ 538,004     $ 859,797       (37.4 )%
Wages, salaries and benefits
    580,426       588,412       (1.4 )
Maintenance, materials and repairs
    255,198       254,798       0.2  
Depreciation and amortization
    149,689       184,044       (18.7 )
Other rentals and landing fees
    123,194       117,558       4.8  
Passenger handling
    128,152       166,683       (23.1 )
Special charges
    42,162       115,332       (63.4 )
Flight equipment rentals
    29,567       8,415       251.4  
Other operating expenses
    108,273       115,218       (6.0 )
                         
Total operating expenses
  $ 1,954,665     $ 2,410,257       (18.9 )%
 
Aircraft fuel.  Aircraft fuel expense decreased by $321.8 million, or 37.4%, for 2009 as compared to 2008. The decrease was primarily due to a $1.42 per gallon decrease in the average price of jet fuel, representing a 44% decrease from 2008 prices, as well as a 5% decrease in the number of gallons of jet fuel used resulting from decreased block hours. Our average jet fuel costs were $1.82 per gallon during 2009 as compared to $3.24 per gallon during 2008. Additionally, there was a 5% decrease in the number of gallons of jet fuel used resulting from decreased block hours. Jet fuel expense is net of hedging gains (losses) allocated to us by American, which amounted to a loss of $59.9 million and a gain of $36.6 million in 2009 and 2008, respectively.
 
Wages, salaries and benefits.  Wages, salaries and benefits decreased by $8.0 million, or 1.4%, during 2009 as compared to 2008. The decrease in wages, salaries and benefits was primarily attributable to a decrease in the number of employees which was partially offset by an increase in health care and insurance costs and workers’ compensation expense.
 
Depreciation and amortization.  Depreciation and amortization expense decreased by $34.4 million, or 18.7%, during 2009 as compared to 2008. The decrease in depreciation and amortization was primarily due to the 2008 sale of 39 Super ATR 72 aircraft resulting in a $25.4 million decrease in depreciation, the impairment charge related to our ERJ-135 aircraft resulting in a $2.2 million decrease in depreciation, and a $3.6 million decrease due to certain ERJ-135 aircraft that were classified as held for sale and therefore not depreciated in 2009.
 
Other rentals and landing fees.  Other rentals and landing fees increased by $5.6 million, or 4.8%, during 2009 as compared to 2008. The increase in other rentals and landing fees was primarily due to rate increases for landing fees in certain markets.
 
Passenger handling.  Passenger handling expense decreased by $38.5 million, or 23.1%, during 2009 as compared to 2008. As of January 2009, certain passenger handling fees previously classified as pass-through or controllable in 2008 were absorbed by American. This resulted in a $25.1 million decrease in associated costs, including catering, security and passenger assistance charges, for 2009 as compared to 2008. In addition, travel and incidental expenses associated primarily with crew hotel and transportation costs decreased by $5.1 million mainly due to decreased departures as well as lower headcount of pilots and flight attendants during the year ended December 31, 2009.
 
Flight equipment rentals.  Flight equipment rental expense increased by $21.2 million, or 251.4%, during 2009 as compared to 2008. The increase in flight equipment rentals was primarily due to the December 2008 sale of 39 Super ATR 72 aircraft resulting in a $27.1 million increase in aircraft rentals net of amortization of deferred gain on sale. In addition, we returned all of our leased Saab B+ aircraft to the lessor in 2008 resulting in a $5.2 million decrease in lease charges in 2009.


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Special charges.  Special charges decreased by $73.2 million, or 63.4%, during 2009 as compared to 2008. The decrease in special charges related to the impairment of certain ERJ-135 aircraft to their estimated fair values recognized during 2009 and 2008. The impairments amounted to a $113.5 million reduction in aircraft value in 2008 and a $42.2 million further reduction in value in 2009. For further information, see Note 3 to our audited historical consolidated financial statements.
 
Other income (expense).  Other income (expense) consists of interest income, interest expense and other miscellaneous expenses. Other expense decreased to $106.4 million for 2009 from $108.9 million in 2008. Currently, all transactions with affiliates are recorded on our consolidated balance sheet in “Funds due from AMR affiliates.” Interest is earned or charged on these receivables or payables at the rate of return American earns on its short-term investment portfolio. Net interest income from affiliates decreased $13.7 million, or 71.6%, for 2009 as compared to 2008 due to a decrease in the balance in “Funds due from AMR affiliates.” Interest expense decreased $13.5 million, or 10.9%, due to a reduction in debt balances.
 
Income tax provision.  Our effective tax rate was 28% and 32% for the years ended December 31, 2009 and 2008, respectively. For 2009, the effective tax rate differed from the U.S. statutory rate due to a state deduction associated with dissolving one of our subsidiaries. Our 2008 rate was less than the statutory rate due to a benefit recorded to reduce the state rate used to record our state deferred tax liabilities resulting from an overall trend of decreasing effective state income tax rates.
 
Liquidity and Capital Resources
 
General
 
Contemporaneously with the spin-off, we expect AMR will make a capital contribution to us currently contemplated to be approximately $50 million in cash, and AMR or American will agree to be responsible for certain other payables, liabilities and accrued interest that we previously incurred on their behalf, as described below. We intend to use the proceeds of the capital contribution to support our working capital needs and the growth of our business and for general corporate purposes. In addition, in connection with the spin-off, we expect American to provide us with a revolving credit facility. We currently anticipate that we will be able to fund our ongoing working capital and capital expenditures for the next 12 months through cash flows from operations, the cash contribution from AMR and availability under our revolving credit facility. However, our future cash flows and profitability are highly dependent upon the utilization of our aircraft under the Air Services Agreement. If American reduces the utilization levels of our aircraft below current utilization levels, then our liquidity would be adversely impacted.
 
Currently, American provides a treasury function for us, whereby substantially all the cash we generate from our contracts with American is held by American. American in turn funds our disbursements, resulting in a net receivable to us or payable from us. Other transactions between us and AMR and its other affiliates are also settled through this account. Following the spin-off, we will maintain a separate cash management system and separate cash accounts and transactions with American will no longer be settled through this account. Rather, transactions with American and its affiliates will be settled in cash upon payment terms provided for in the various agreements between us and American.
 
As of June 30, 2011, we had accounts payable and other accrued liabilities of approximately $185 million. Contemporaneously with the spin-off, certain payables aggregating approximately $135 million at June 30, 2011, will be retained by us, but AMR or American will agree to be responsible for, and we will be released from, certain other payables, workers’ compensation liabilities and accrued interest (totaling approximately $50 million at June 30, 2011) that we previously incurred on their behalf. In addition, prior to the spin-off, we will transfer all of our jet aircraft and certain intercompany receivables owed to us by American (including our $293 million account receivable due from American at June 30, 2011), to American. In consideration for the transfer of the jet aircraft by us to American, American will take the jet aircraft subject to, and we will be released from, indebtedness related to the aircraft, on which AMR is already the guarantor. As a result, we will no longer be required to make debt payments on our aircraft. Our aircraft-related debt payments were $237.0 million, $226.1 million and $219.4 million, for the years ended December 31, 2010, 2009 and 2008, respectively.


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In 2010, 2009 and 2008, we spent $313.3 million, $43.2 million and $24.4 million, respectively, on capital expenditures, primarily related to acquiring new aircraft and paying aircraft purchase deposits. In 2009, we exercised a purchase option for 22 CRJ-700 aircraft to be delivered in 2010 and 2011, which were fully financed. We expect our capital expenditure requirements for 2011 and 2012 will be limited, and our capital expenditure budgets will be approximately $20 million in 2011 and $25 million in 2012. However, our capital requirements will likely increase if we obtain regional flight operations business at higher than historical rates from other airlines or if we expand our ground handling business.
 
Cash Flows from Operating Activities
 
As of June 30, 2011, we had cash and cash equivalents of $5.1 million. Cash provided by operations for the six months ended June 30, 2011 was $127.9 million as compared to $126.2 million for the six months ended June 30, 2010. Cash provided by operations for the year ended December 31, 2010 was $256.3 million, as compared to $308.3 million for the year ended December 31, 2009. Cash provided by operations in 2009 was higher than 2010 due to the reimbursement by American of a $42.2 million aircraft impairment charge.
 
Cash Flows from Investing Activities
 
Net cash used in investing activities increased $104.2 million to $155.0 million for the six months ended June 30, 2011, compared to $50.8 million for the six months ended June 30, 2010. This increase was due to the acquisition of aircraft.
 
Net cash used in investing activities increased $267.0 million to $309.6 million for the year ended December 31, 2010, compared to $42.6 million for the year ended December 31, 2009. The change was primarily due to the acquisition of aircraft in 2010 and related purchase deposits for future deliveries.
 
Cash Flows from Financing Activities
 
Net cash provided by financing activities was $29.1 million for the six months ended June 30, 2011, as compared to cash used in financing activities of $74.2 million for the six months ended June 30, 2010. The difference was primarily due to cash inflows from financing of the delivery of eight CRJ-700 aircraft in 2011.
 
Net cash provided by financing activities increased $322.1 million to $55.1 million for the year ended December 31, 2010, compared to cash used for financing activities of $267.0 million at December 31, 2009. In 2010, we borrowed $291.6 million to finance the delivery of CRJ-700 aircraft, which was offset by debt payments of $237.0 million on existing aircraft related debt. For the year ended December 31, 2009, we used $267.0 million in cash from financing activities for payments on long-term debt of $226.1 million, a dividend payment of $650.0 million to AMR, offset by net funds transferred from AMR affiliates of $610.0 million.
 
Contractual Obligations
 
The following table sets forth our contractual obligations as of June 30, 2011 (in thousands):
 
                                         
    Estimated Payments Due By Period  
          2012 and
    2014 and
    2016 and
       
    2011     2013     2015     Beyond     Total  
 
Operating lease payments for aircraft and facilities(1)
  $ 25,943     $ 92,491     $ 47,949     $ 2,157     $ 168,540  
Long-term debt(2)
    167,620       674,650       648,205       1,145,540       2,636,015  
Capital lease obligations
    134       282       33             449  
                                         
Total
  $ 193,697     $ 767,423     $ 696,187     $ 1,147,697     $ 2,805,004  
                                         
 
 
(1) Operating lease payments consist of rental payments on our Super ATR 72 aircraft and rent for various airport stations and facilities. Prior to the spin-off, we will transfer certain of our leasehold interests to American. In addition, following the spin-off, under the Air Services Agreement, rent expense for our aircraft fleet will be a nominal amount


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per month and passenger airport facilities rent will be absorbed by American. As a result, we expect our future commitments for operating lease payments for aircraft and facilities will not be material.
 
(2) Amounts represent contractual amounts due including interest. Interest owed on variable rate debt was estimated based on the current rate as of June 30, 2011. Prior to the spin-off, all of our jet aircraft and certain intercompany receivables owed by us to American, will be transferred to American. In consideration for the transfer of the jet aircraft, American will take the jet aircraft subject to, and we will be released from, indebtedness related to the aircraft. Accordingly, we do not expect to have future contractual obligations for this debt.
 
Critical Accounting Policies
 
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The SEC has defined critical accounting policies as those policies that are most important to the preparation of financial statements and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. The development and selection of these critical accounting policies have been determined by our management. Due to the significant judgment involved in selecting certain of the assumptions used in these areas, it is possible that different parties could choose different assumptions and reach different conclusions. We consider the policies relating to the following matters to be critical accounting policies:
 
Regional air services and ground handling revenues.  Regional air services revenues and ground handling services revenues are recognized when service is provided. Under both the Historical ASA and the Air Services Agreement, revenue is considered earned when the flight is completed. Under our ground handling contracts with American and other airlines, we recognize revenue when the service is provided at arrival or departure of the aircraft. After the spin-off, the Air Services Agreement will provide for incentive payments which will be recognized when probable.
 
Long-lived assets.  We had $2.6 billion of property and equipment related assets as of June 30, 2011. Additionally, as of June 30, 2011, we had $11.4 million of airport operating rights intangible assets. The recorded value of our fixed assets is impacted by a number of estimates made by us, including estimated useful lives, salvage values and our determination as to whether aircraft are temporarily or permanently grounded. In accordance with U.S. generally accepted accounting principles, we record impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets and the net book value of the assets exceeds their estimated fair value. In making these determinations, we use certain assumptions, including, but not limited to: (i) estimated fair value of the assets and (ii) estimated future cash flows expected to be generated by the assets, generally evaluated at a fleet level, which are based on additional assumptions such as asset utilization, length of service and estimated salvage values.
 
In 2008, due to American’s capacity reduction announcement, we concluded a triggering event had occurred and required that fixed assets be tested for impairment. As a result of that testing, we recorded a $113.5 million impairment charge related to our ERJ-135 aircraft. In 2009, due to the continuing severe downturn in the global economy and weakness in the regional jet aircraft market, our plan to sell certain of our ERJ-135 aircraft was no longer feasible at the amount for which these aircraft had been valued. Consequently, we reclassified these aircraft from held for sale to held for use, tested them for impairment and concluded the carrying values of certain of our ERJ-135 aircraft were no longer recoverable and recorded a $42.2 million impairment charge.
 
Prior to the spin-off, we will transfer to American all of our jet aircraft and certain others assets related to our regional flight operations and ground handling businesses, and airport operating rights will either be corrected or reallocated to American to the extent permitted by third parties. As of June 30, 2011, these assets had a net book value of $2.4 billion. After the transfer, correction or reallocation of these assets to American, the judgments and estimates involved in accounting for our long-lived assets will be greatly reduced.


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Maintenance.  We have engine service agreements with third party vendors to provide engine overhaul services for the regional jet aircraft that we operate. Under the terms of the agreements, we pay a set dollar amount per flight hour or cycle on a monthly basis and the third party vendor assumes the responsibility to overhaul the engines at no additional cost to us, subject to certain specified exclusions. Maintenance costs under these contracts are recognized when the flight hour or cycle is flown pursuant to the terms of the contract. We use the direct expense method of accounting for our Super ATR turbo-prop engine overhauls where the overhaul costs are expensed when the overhaul event occurs. The costs of maintenance for airframe and avionics components, landing gear and normal recurring maintenance are expensed as incurred.
 
Inventories.  Inventories, expendable parts and maintenance supplies relating to flight equipment are carried at average cost and are expensed when the inventory is used. A fleet retirement reserve is provided over the remaining estimated useful life of the related aircraft equipment, for spare parts expected to be on hand at the date the aircraft are retired from service, less an estimate of the residual value, plus allowances for spare parts currently identified as obsolete or excess. The adequacy of our fleet retirement reserve requires a high degree of judgment considering expectation of the fleet life and residual value of inventory at the expiration of the fleet life. Following the spin-off, our inventory reserves may be impacted by our assessment of whether we have excess inventory on hand due to changes in the number of aircraft covered under the Air Services Agreement.
 
Income taxes.  We will be included in AMR’s consolidated tax return for 2010 as a wholly-owned subsidiary of AMR. Under the terms of the Tax Sharing Agreement with AMR, the provision for income taxes has been computed on the basis that we file a separate consolidated income tax return with our subsidiaries, subject to certain interpretations as described in Note 8 to our audited historical consolidated financial statements. All tax amounts are settled through intercompany accounts with AMR affiliates. We record a deferred tax asset valuation allowance when it is more likely than not that some or all of our deferred tax assets will not be realized. We consider our historical earnings, trends and outlook for future years (including reversals of deferred tax liabilities) in making this determination. As of December 31, 2010, we had available for federal and state income tax purposes NOLs of approximately $1.5 billion and $747.0 million, respectively.
 
In connection with the spin-off, we will be allocated a portion of AMR’s NOL carryover balance for U.S. Federal income tax purposes. We estimate that the allocated portion of the NOL carryover following the distribution will be approximately $800 million and will, under certain conditions, be available to us to offset a significant portion of any cash obligations we will owe for our future U.S. Federal income taxes. These NOLs expire between 2022 and 2029. Our ability to use such NOLs against future taxable income could be limited if there is an ownership change (generally cumulative stock ownership changes exceeding 50% during a three-year period as determined under Section 382 of the Internal Revenue Code) with respect to (i) our common stock prior to or after the distribution or (ii) AMR common stock prior to the distribution.
 
To avoid a potential adverse effect on our ability to use the NOL carryover allocable to us for U.S. Federal income tax purposes, our amended and restated certificate of incorporation will contain a “5% Ownership Limitation,” which will prohibit certain transfers of our stock. The 5% Ownership Limitation will be applicable to all stockholders except [•] and will remain in effect until the earlier to occur of (i) [•], 20[•], or such later date as may be approved by our board of directors, (ii) the repeal, amendment or modification of Section 382 of the Internal Revenue Code (and any comparable successor provision) in such a way as to render the restrictions imposed by Section 382 of the Internal Revenue Code no longer applicable to us, (iii) the beginning of our taxable year in which no available NOL carryovers remain and (iv) the date on which the limitation amount imposed by Section 382 of the Internal Revenue Code would not be materially less than our remaining NOL carryovers. Even with the 5% Ownership Limitation, no assurance can be given that an ownership change will not occur, in which case the availability of our substantial NOL carryover and other U.S. Federal income tax attributes would be significantly limited.
 
Additionally, prior to the spin-off, we will transfer to American all of our jet aircraft and related deferred tax liabilities. Accordingly, our assessment of our ability to realize our deferred tax assets after the spin-off will be primarily based on our ability to generate future taxable income, exclusive of reversing of a substantial


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portion of current deferred tax liabilities, as well as consideration to the risk of an ownership change as described above. This assessment involves significant management judgment due to our historical operations not necessarily being indicative of future trends. Based on our current projections of future income under the terms of the Air Services Agreement and Ground Handling Agreement, we will likely record a valuation allowance on the NOL allocated to us by AMR in connection with the spin-off.
 
Off-Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements as defined in Item 303 of Regulation S-K. However, we do have operating leases for certain facilities and our Super ATR 72 aircraft as further described in the Notes to the Consolidated Financial Statements.
 
Quantitative and Qualitative Disclosure About Market Risk
 
Because all of our current regional air services revenues are derived from capacity purchase contracts, we are not subject to any significant degree to market risks such as commodity price risk and interest rate risk.
 
Aircraft fuel.  Under the Historical ASA and the Air Services Agreement with American, fuel is a pass-through or absorbed cost, and therefore we do not bear the market risk associated with volatility in the price of fuel.
 
Interest rates.  We do not hold long-term interest sensitive assets, and therefore, we are not exposed to interest rate fluctuations for our assets. We do not purchase or hold any derivative financial instruments to protect against the effects of changes in interest rates.


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BUSINESS
 
Overview
 
We are a leading regional airline that provides both regional flight operations and ground handling services throughout North America. Currently, we are the third largest regional airline in the U.S. based on aircraft operated, and we believe we are one of the largest ground handlers in the U.S. based on departures handled. We provide regional flight operations to American and ground handling services to passenger airlines, including American and 13 other airlines. At July 1, 2011, we had an active regional aircraft fleet of 281 aircraft providing 1,653 daily regional flight departures throughout the U.S., the Bahamas, the Caribbean, Mexico and Canada, and provided ground handling services for 1,619 daily departures at more than 100 airports across the U.S., the Bahamas, the Caribbean and Canada. Through our long operating history, we have developed significant competitive strengths, including a strong and long-standing relationship with American, a highly skilled workforce, a broad geographic footprint, an experienced management team and significant experience providing a wide range of services. Our business strategy is to reduce our operating costs, maintain our long-standing relationship with American, diversify and expand our regional flight operations business with other airlines and continue to expand our ground handling business with American and other airlines.
 
Prior to the spin-off, we will enter into the Air Services Agreement with American, which will have a nine-year term as of the distribution date. In addition, we will have additional agreements with AMR and American, including an eight-year Ground Handling Agreement covering 106 airport locations, which will become effective on the distribution date. We believe the Air Services Agreement and Ground Handling Agreement will provide us with a predictable, on-going revenue base for several years following the spin-off. For the six months ended June 30, 2011, on a pro forma basis, we generated $648.9 million of total operating revenues, $4.9 million of total operating income and $3.4 million of net income. For the six months ended June 30, 2011, on a pro forma basis, regional flight operations and ground handling services accounted for approximately 80% and 20% of our total operating revenues, respectively.
 
We operate our businesses primarily through two wholly-owned subsidiaries, American Eagle and Executive, which both hold FAA operating certificates. Following the spin-off, we will continue to provide regional flight operations using the “American Eagle” tradename. Until completion of the spin-off, we will remain a wholly-owned subsidiary of AMR.
 
Regional Flight Operations
 
We seek to provide regional flight operations for mainline carriers’ network needs. Upon completion of the spin-off, we will initially provide regional flight operations solely to American pursuant to the Air Services Agreement. As an independent company, we will seek to maintain this business with American and pursue new opportunities to provide regional flight operations to other airlines.
 
Under the Air Services Agreement with American, we will operate under American’s AA flight designator code, or such other flight designator codes as directed by American. American will control and be responsible for our scheduling, ticket pricing and seat inventories. American will be entitled to all ticket, cargo and ancillary revenues associated with the operation of the aircraft and will be responsible for all revenue-related expenses, including commissions, reservations and passenger ticket processing expenses. Following the spin-off, American will compensate us on a monthly basis for the regional flight operations we provide in accordance with established pre-set rates, which we believe are current market rates. In addition, certain costs incurred by us will be reimbursed by American at our out-of-pocket cost with no mark-up, such as landing fees and insurance premiums, and certain costs of our operations will be incurred directly by American, such as fuel and the costs of passenger handling services. See “Agreements with AMR and Its Affiliates.”
 
Ground Handling Services
 
Our ground handling business provides American and other mainline carriers and regional flight operators with a comprehensive range of passenger and ramp services. While we provide a significant portion of our ground handling services to regional airlines, in general, the selection of the ground handling service provider


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is made by the mainline carrier responsible for scheduling the aircraft. When choosing a ground handling service provider, mainline carriers typically can choose to provide the services with their own staff, contract with the regional airline or contract with third party providers. The range of passenger services we provide includes passenger check-in and ticketing, passenger gate operations, baggage services, skycap services, wheelchair assistance and intra-airport transportation. The range of ramp services we provide includes aircraft parking, pushback and towing, baggage handling, aircraft cleaning, de-icing services and water and lavatory services. Typically, we provide our customers with custom ground handling solutions to meet their particular needs at each location.
 
We have been providing ground handling services since 1984. We believe our more than 6,400 ground handling employees, broad geographic footprint and experience operating in a large hub environment provide us with a distinct competitive advantage in providing ground handling services to American and other airlines.
 
Following the spin-off, we will provide ground handling services for American’s flight operations at 106 airport locations pursuant to the Ground Handling Agreement. The services we provide and the rates at which we are compensated will be specified on an airport-by-airport basis. For providing ground handling services, American will compensate us through a pre-set rate per actual arrival and subsequent departure of a handled aircraft at a particular airport, subject to certain adjustments. In addition, we will be reimbursed at our costs for certain additional charges, such as catering, de-icing fluids and other supplies provided by us, specified third party services and certain taxes and fees. See “Agreements with AMR and Its Affiliates.”
 
Our Strengths
 
We believe we are well positioned to execute our business strategy and benefit from current airline industry trends due to the following competitive strengths:
 
General
 
Strong and Longstanding Relationship with American.  Our over 25-year relationship with American provides us with a competitive strength among regional airlines and ground handling service providers and positions us to earn a significant amount of business from American if it expands its business or after the Air Services Agreement and Ground Handling Agreement expire. At July 1, 2011, we provided 93% of the regional flight operations and 85% of the ground handling services for American’s regional flights. Notwithstanding American’s desire to diversify its regional flight operations, the services we provide are important to American’s overall strategy and there would be significant costs to American if it decided to move most or all of its regional business to other regional carriers in a short period of time. In addition, American’s current labor agreement with the Allied Pilots Association restricts American’s ability to use regional carriers other than us for flying the CRJ-700 aircraft on its behalf.
 
Contractual Relationships at Market Rates.  Following the spin-off, the Air Services Agreement and Ground Handling Agreement with American will provide us with a predictable source of revenue for the designated contract terms, subject to certain adjustments and reset rights. Although American will have the right to withdraw certain aircraft from the Air Services Agreement or withdraw ground handling services at certain airports from the Ground Handling Agreement prior to the expiration of the specified terms of the agreements, we believe the predictability of this source of revenue as a result of the contractual relationship with American should reduce our financial risk and enhance our ability to implement our strategy. Additionally, following the spin-off, these agreements will reflect what both we and American believe are current market rates for these services. We believe aligning our cost structure with the rates we receive from American should enable us to compete successfully for additional business.
 
History of Positive Labor Relations.  We have a highly skilled workforce with over 7,100 aviation professionals and over 6,400 ground handling employees. A significant portion of our employees are represented by collective bargaining groups. We believe our employees are one of our greatest assets, and our management believes that maintaining positive relationships with our employees has been, and will continue to be, key to our success. Our management continues to work with representatives of our collective bargaining groups to develop creative solutions to issues facing our business and the industry in general.


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Experienced Executive Team.  Our senior executive team collectively has over 100 years of experience across varying specialties in the airline industry, with an average of 20 years of individual airline experience. Our experienced leadership better positions us to provide our customers with the highest quality service, to anticipate our customers’ priorities and objectives and to pursue growth opportunities in the regional airline and ground handling markets.
 
Significant Net Operating Loss Carryover.  In connection with the spin-off, we will be allocated a portion of AMR’s NOL carryover balance for U.S. Federal income tax purposes. We estimate that the allocated portion of the NOL carryover following the distribution will be approximately $800 million and will, under certain conditions, be available to us to offset a significant portion of any cash obligations we will owe for our future U.S. Federal income taxes. These NOLs expire between 2022 and 2029.
 
Regional Flight Operations
 
One of the Largest Regional Airlines in the U.S.  We are the third largest regional airline in the U.S. based on aircraft operated and the fourth largest regional airline in the U.S. based on passengers carried, with experience operating aircraft ranging from 37- to 66-seat capacity, including 2-class aircraft. To support our geographically diversified operations, we have established a network of operations facilities, pilot bases and maintenance facilities throughout North America, which we believe can support future growth. In addition, in our largest markets, we believe we have consistently achieved among the highest performance results when compared to other regional airlines, including our controllable completion factor and our on-time performance. We believe our experience with a diversified range of aircraft types and network of established locations and facilities will allow us to compete successfully for new business.
 
Lower Risk Airline Operations.  As a regional airline operating under the Air Services Agreement, which is a capacity purchase agreement, we will have a fundamentally different business model from a mainline carrier. Under the Air Services Agreement, we will have no passenger revenue risk or fuel risk, which provides us with a more predictable per flight revenue stream than a mainline carrier. In addition, we will have no residual aircraft liability on the aircraft we operate for American under the Air Services Agreement because the aircraft will be leased or subleased to us by American, and the leases will terminate before or contemporaneously with any termination of the Air Services Agreement. As a result, following the completion of the spin-off, we will have no aircraft debt and all aircraft rental payments will be paid directly or reimbursed by American. Upon expiration of any underlying aircraft lease or sublease, American will be solely responsible for redeploying the aircraft. Because we will have no long-term debt upon completion of the spin-off, we believe we will have a conservative capital structure.
 
Ground Handling Services
 
Broad Geographic Footprint and Significant Market Presence.  At July 1, 2011, we had ground handling operations at more than 100 airports in the U.S., the Bahamas, the Caribbean and Canada and we have a strong record of providing ground handling services to American for its mainline and regional operations, including at large airports where the high numbers of connecting passengers make operations more complex. This market presence, scale and know how allows us to be a low-cost provider in these markets and enhances our ability to attract new customers and retain our existing customers. We also provide ground handling services to Air Georgian, AirTran Airways, Allegiant Air, British Airways, Continental for Continental Express, Delta for Delta Connection, Frontier Airlines, Alaska Airlines, Jazz Air, JetBlue Airways, Spirit Airlines, Sun Country Airlines and US Airways for US Airways Express. Although our customers other than American only represented 5% of our ground handling services revenue for the six months ended June 30, 2011, we believe our geographic reach, market presence and experience with sophisticated operations should enable us to compete for new business at our existing and new locations for a broader universe of potential customers.
 
Wide Range of Ground Handling Services.  We provide our customers with a wide range of services from aircraft arrival through departure. By providing a broad range of services, we are able to build on existing customer relationships and cross-sell our services. For example, when we attract a new customer for


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baggage loading, we may offer that customer additional services such as aircraft cleaning, de-icing or passenger ticketing at the same or another airport.
 
Our Strategy
 
To maintain our existing American business and expand our operations and our customer base, we plan to implement the following strategies:
 
Regional Flight Operations
 
Reduce Our Operating Costs.  Over the last several years, we have implemented a series of initiatives to lower our operating costs, including increasing productivity of airport employees and lowering headcount through the use of software and hardware technology, increasing the efficiency of our maintenance programs through the use of new software systems and outsourcing the process of selecting and scheduling crew hotels. Despite the success of these initiatives, we currently have higher labor costs than our competitors, primarily due to the higher average level of seniority relative to our competitors of our employees that are represented by collective bargaining groups. We have had, and continue to have, ongoing discussions with our collective bargaining groups to develop other initiatives to improve productivity, lower costs and provide better long-term job prospects. We believe our seniority will be reduced as mainline carriers grow and seek to hire our more experienced personnel to fill open positions and as our senior employees reach retirement age. In addition, our current pilots have the option to transfer to American as positions with American become available.
 
Maintain Our Business with American.  We and our predecessors have flown primarily for American since 1984. At July 1, 2011, we provided 93% of American’s regional flight operations. Although American’s objective is to reduce this dependence on us over time through diversification of its regional feed, we believe our long-established relationship with American positions us well to earn a significant amount of our existing business when our agreements with American expire. We intend to aggressively manage our costs and work closely with American to provide excellent customer service and offer efficient, reliable and high quality regional flight operations.
 
Pursue Growth Opportunities with Other Mainline Carriers.  We have two operating certificates, which provides us with the flexibility to fly for other airlines. We believe there will be significant opportunities to compete for regional flight operations business over the next five years due to the expiration of existing agreements with other regional carriers. We estimate that 14 aircraft contracts for regional flight operations covering 276 aircraft will expire through 2016. In addition, between 2000 and 2009, regional airlines increased their share of domestic capacity from 4% to 13%. Earlier this year, the FAA forecasted that regional capacity will grow at an average of 4% per year through 2030 compared to an average of 2.7% per year for mainline carriers. With these industry trends, our long track record of providing high quality, reliable regional flight operations to one of the world’s largest airlines, and with the flexibility provided by our operating certificates, we believe we will be well positioned to compete for the regional flight operations of other mainline carriers.
 
Ground Handling Services
 
Grow Our Customer Base at Existing Locations.  We intend to market our wide range of ground handling services and broad geographic presence to increase our customer base across our existing network of more than 100 airports. We believe our diversified services and broad geographic presence will provide us with a competitive advantage when offering our services to potential new customers. Further, as a result of our established market position, in many cases we can offer services to new customers without incurring additional fixed costs, which we believe gives us a competitive advantage when we compete for new business at locations where we already operate. We are currently the only company providing ground handling services to scheduled airlines at 12 locations where we operate and one of only two companies providing ground handling services to scheduled airlines at 13 locations where we operate, which positions us well for additional business at these locations. We believe that as an independent company, we will have a greater opportunity to invest in our ground handling business to pursue new customer opportunities at our existing locations.


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Cross-Sell Our Ground Handling Services.  By providing a broad range of ground handling services at a large number of airports, we believe we are well positioned to cross-sell additional services to our customers, including at additional locations. For example, at one of our major locations, we recently expanded our operations to include skycap and special assistance services. As mainline carriers continue to focus on their core flying operations, we believe they will outsource more ground handling services, which will provide us with the opportunity to cross-sell our services.
 
Expand to New Ground Handling Locations.  We intend to continue the long-term expansion of our ground handling operations with selective development of additional domestic locations. Historically, our ability to invest in our ground handling business was controlled by American, which limited our ability to invest in new third-party business. As an independent company, we believe we will have a greater ability to invest in growth opportunities as they arise, including through potential acquisitions of other ground handling operators.
 
Our History
 
We were formed through the creation or acquisition by American of several regional airlines. The American Eagle brand started in November 1984, when independent airline, Metroflight, began flying with service to seven cities from Dallas/Fort Worth International Airport. By the end of 1984, independent airlines using the American Eagle brand served eight cities with 60 daily flights from Dallas/Fort Worth International Airport, and by 1986, served 100 cities with 1,000 daily departures.
 
In 1998, all the American Eagle airlines owned by American were merged into one subsidiary, except Executive Airlines, which remains on a separate FAA operating certificate. In 1999, American acquired Business Express, the largest regional airline in the northeast. We reached our current form in December 2000 when Business Express was merged into American Eagle.
 
Our Industry
 
Regional Airline Industry
 
The Relationship Between Mainline Carriers and Regional Airlines.  The airline industry in the U.S. has traditionally been served primarily by several mainline carriers, such as Alaska Airlines, American Airlines, Delta Air Lines, JetBlue Airways, Southwest Airlines, United Airlines and US Airways. These airlines’ basic function is to transport passengers and their luggage from one point to another. In addition, they transport cargo and provide other ancillary products and services to generate additional revenue from the flights they operate. These airlines offer their services at prices that vary depending on the supply and demand for their services and they assume the risk for the revenue that is generated per flight. In addition, these airlines’ cost structures are made up of fixed and variable costs with the most significant costs being aircraft, fuel and labor expenses.
 
Regional airlines typically provide mainline carriers with regional flight operations using smaller regional aircraft operated on lower traffic volume routes or on high traffic volume routes at off peak periods. These regional airlines use the mainline carrier’s two-letter flight designator codes to identify the regional airline’s flights and they are painted with the mainline airline’s livery. In contrast to mainline carriers, regional airlines generally do not try to establish an independent route system to compete with the other airlines. Rather, regional airlines typically enter into contracts with one or more mainline carriers, pursuant to which the regional airline agrees to use its smaller, lower trip cost aircraft to carry passengers booked and ticketed by the mainline carrier between a hub of the mainline carrier and a smaller outlying city. Under these contracts the mainline carrier directs the regional airline where and when to fly and in exchange for such services, the mainline carrier pays the regional airline either a fixed fee for the capacity purchased, termed “capacity purchase,” or pays a percentage of the ticket revenue to the regional, termed “pro-rate.” See “— Regional Airline Contract Descriptions.” The mainline carrier is responsible for obtaining any airport facilities and services necessary for the operation of the regional airline, including the handling of passengers and aircraft, which it may elect to do itself or by contracting with a third party for the services.


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History of the Regional Airline Industry.  Since the deregulation of the airline industry in 1978, regional airlines have expanded their role in the U.S. transportation system. During 2009, 30% of large commercial aircraft and 61% of regional jets in the world were operated in North America. The rapid domestic growth of regional jets was spurred by three factors: labor cost arbitrage, new technology and an excess of hubs.
 
By the late 1990s, pilots at mainline carriers were paid rates significantly higher than the rates paid to pilots of regional jets and many of the scope clauses in U.S. labor contracts with mainline carrier pilots restricted the mainline carriers’ ability to outsource flying on planes with more than 50 seats. With the introduction of faster and more customer-friendly regional jets in the 1990s, using smaller planes for a wide range of secondary routes became much more attractive. In addition, during the 1991 recession, many mainline carriers found themselves operating too many hubs as the demand for air travel contracted. Mainline carriers realized that shifting to smaller regional jets to reduce capacity but maintain market presence reduced the cost of serving those routes.
 
Following the introduction of the regional jet, demand for regional jets quickly exceeded supply, making regional airlines an important strategic imperative for mainline carriers. Many mainline carriers had either started or purchased regional airlines in the years leading up to the late 1990s, and they used these regional airlines to order new fleets of regional jets to deploy in their networks. In the late 1990s, mainline carriers that did not develop significant regional airlines during the 1990s actively acquired independent regional airlines in order to add regional jet capacity to their route network. Subsequent to this period, for a variety of reasons, such as public market opportunities and cost increases due to the mainline carrier ownership, many of these mainline carriers then divested their regional airlines.
 
Many of the factors that spurred the historical regional jet growth have reversed in recent years. For example, many of the post-bankruptcy pay and benefit cuts implemented by mainline carriers have narrowed the pay gap between mainline carriers and regional airlines, thereby reducing the regional airline industry’s preexisting labor cost advantages. Higher fuel prices have further diminished the relative cost advantages of regional jets when compared to the economies of scale associated with larger aircraft. In addition, mainline carriers have eliminated or downsized secondary hubs where regional jets accounted for the majority of departures.
 
The current market trends for regional airlines have led to significant consolidation beginning in 2005 when SkyWest Airlines bought Atlantic Southeast Airlines from Delta Air Lines. Transactions in 2010 included:
 
  •  Pinnacle Airlines Corp. acquired Mesaba Aviation, Inc. from Delta Air Lines
 
  •  Trans States Holdings, Inc. acquired Compass Airlines, Inc. from Delta Air Lines
 
  •  SkyWest, Inc. acquired ExpressJet Holdings
 
As a result and after giving effect to the consolidations in 2010, the majority of available seat miles flown by regional airlines were concentrated at the top three regional airlines and their operating subsidiaries during 2010. The recent consolidation has decreased the market of competitors and recent regional capacity reductions have decreased the number of regional aircraft in service.
 
Regional Airline Contract Descriptions.  Regional flight operations are typically conducted under two types of contracts: capacity purchase contracts or pro-rate contracts. Under a capacity purchase contract, the mainline carrier generally purchases the entire capacity of a set number of aircraft and schedules the routes those aircraft fly. The mainline carrier pays the regional airline a fixed-fee for each departure, with additional incentives based on performance metrics, including completion of flights and on-time performance. In addition, the mainline carrier and regional airline often enter into a contract pursuant to which the mainline carrier bears the risk of changes in the price of fuel and other such costs that are passed through to the mainline carrier partner. Regional airlines benefit from a capacity purchase contract because they are sheltered from most of the elements that cause volatility in airline earnings, including variations in ticket prices, passenger loads and fuel prices. However, regional airlines under capacity purchase contracts do not benefit from positive trends in ticket prices, passenger loads or fuel prices and, because the mainline carriers absorb


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most of the risks, the margin between the fixed fees for a flight and the expected per flight costs tend to be less volatile and can be smaller than the highest margins achievable with pro-rate contracts.
 
Under a pro-rate contract, also known as a revenue sharing contract, the mainline carrier and regional airline negotiate a proration formula, pursuant to which the regional airline receives a percentage of the ticket revenue for those passengers traveling for one portion of their trip on the regional airline and the other portion of their trip on the mainline carrier. Substantially all the regional airline’s costs are borne by the regional airline. In such a pro-rate contract, the regional airline realizes increased profits as ticket prices and passenger loads increase or fuel prices decrease and, correspondingly, realizes decreased profits as ticket prices and passenger loads decrease or fuel prices increase.
 
Ground Handling Industry
 
Ground Handling Services.  All aircraft that operate in and out of airports require ground handling services and the ground handling services industry consists of a large number of domestic and international service providers. Principally, the airline that schedules the flight and is responsible for the passengers and facilities is responsible for contracting for the ground handling services. Mainline carriers can either provide the services with their own ground handling personnel or they can outsource these services to a third party. Their choices for outsourcing generally consist of regional airlines that have ground handling operations, unaffiliated national or regional ground handlers, fixed base operators and local providers. Mainline carriers outsource ground handling services for both the flights they operate and flights they contract out to regional airlines. Some mainline carriers are restricted by labor agreements in certain locations from using third party ground handling providers so they often have large in-house ground handling operations at their large airports. At airport locations where they are able to outsource, mainline carriers are free to contract for ground handling services with any third party ground handling service provider, including competing regional airlines.
 
Ground handling services generally can be classified into two categories: passenger handling services, such as counter services, security services, movement of air-bridges, lounge services and intra-airport transportation; and ramp services, such as baggage handling, cleaning, fueling, de-icing, snow removal and aircraft towing and pushback. Ground handling service providers will provide all of the ground handling services or specified services depending on the airline customer requirements and their capabilities at the particular airport. There are also specialized companies that offer only certain services at select airports.
 
The typical ground handling services contract is structured to compensate the ground handling service provider for a rate per actual arrival and departure of the handled aircraft. These contracts are typically for a specified term with automatic renewals and termination rights with 60 to 90 days notice. The key competitive factors in this industry are price and quality of service. Ground handling service providers with market presence resulting in economies of scale are generally better positioned to compete on price.
 
We believe growth in this industry may be fueled by several key trends, including growing demand for air transportation and the airline industry’s increasing willingness to outsource non-core services. Further, we believe there will be increased opportunity for large ground handling service providers, such as us, to grow their businesses as mainline carriers increase their focus on using fewer service providers and opportunities to acquire smaller ground handling operators arise.
 
Growing Demand for Air Transportation.  Historically, the ground handling industry has grown along with passenger air traffic. We expect continued growth in passenger air traffic, as well as in the ground services industry, due to, among other factors, economic growth, the growth of low cost carriers and increased international air traffic. According to the DOT, domestic passenger air traffic, as measured by revenue passenger miles, is projected to grow at a compounded annual rate of 3.4% from 2010 to 2020 and domestic departures are projected to grow at a compounded annual rate of 2.1% during the same period.
 
Increased Outsourcing.  Outsourcing ground handling services is a cost-effective alternative to performing services internally for many airlines. For example, outsourcing is cost-effective when a carrier has a limited number of daily flights at a particular airport, making the purchase and maintenance of the necessary equipment and labor uneconomical. As a result, foreign airlines, regional airlines and airlines initiating service


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to a new city typically use third party providers for a relatively high percentage of their ground handling services.
 
We believe outsourcing of ground handling services will increase as:
 
  •  mainline carriers further heighten their focus on their core airline businesses;
 
  •  regional airlines, which historically have been more likely than mainline airlines to have third party providers of ground handling services, continue to increase their share of domestic commercial air traffic;
 
  •  airlines expand to new airports; and
 
  •  new airlines emerge.
 
Fragmented Industry.  The ground handling industry in the U.S. is highly fragmented with ground handling service providers split into five categories: mainline airlines, regional airlines, unaffiliated ground handlers, fixed base operators and local providers. As a result, there are a large number of service providers, many of which provide services at a small number of airports or at a single airport. Many of the smaller providers also specialize in particular geographic areas or niche markets such as cargo warehousing or fueling. We believe smaller providers are likely to face significant competitive pressures as large airlines increasingly outsource to fewer and larger suppliers, such as us, that can provide a broader range of services at multiple locations. The fragmented nature of the industry also presents an opportunity for ground handling service providers to gain scale by consolidating the operations of a number of small providers via acquisition.
 
Our Regional Flight Operations Business
 
General.  As a regional airline, we seek to enter into agreements with mainline carriers to provide regional flight operations for their network needs. Upon completion of the spin-off, we will initially provide regional flight operations solely to American pursuant to the Air Services Agreement. Once we are an independent company, we will seek opportunities to expand our regional flight operations to other airlines.
 
At July 1, 2011, our regional flight operations business:
 
  •  provided 93% of the regional flight operations for American;
 
  •  operated 281 active aircraft;
 
  •  offered scheduled passenger service to 182 cities, with 1,653 daily departures; and
 
  •  was the single largest regional flight operator based on seat capacity at Dallas/Fort Worth International Airport (DFW), New York LaGuardia Airport (LGA), Chicago O’Hare International Airport (ORD), Miami International Airport (MIA) and Luis Munoz Marin International Airport in San Juan, Puerto Rico (SJU).
 
For the six months ended June 30, 2011, our controllable completion factor was reported at 98.9%.


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Markets and Routes.  Our regional flight operations complement American’s operations by carrying passenger traffic that connects with American’s mainline jets and by providing service to smaller cities not economically served by conventional large jet aircraft. At July 1, 2011, we offered scheduled passenger service to the following airports:
 
(MAP)
 
Our Aircraft Fleet.  As shown in the following table, at July 1, 2011, our active aircraft fleet consisted of 245 regional jets and 36 Super ATR turbo-prop aircraft, and our inactive aircraft fleet consisted of 18 ERJ-135 aircraft, three Super ATR 72 aircraft and 41 Saab 340B aircraft.
 
                         
    Average Seating
      Average
    Capacity   Number   Age
 
Active Aircraft:
                       
Bombardier CRJ-700
    63       25       8.2  
Bombardier CRJ-700NG
    65       22       0.7  
Embraer RJ-135
    37       21       11.0  
Embraer RJ-140
    44       59       8.9  
Embraer RJ-145
    50       118       9.3  
Super ATR 72
    66       24       17.3  
Super ATR 72-212A
    66       12       13.5  
Inactive Aircraft:
                       
Embraer RJ-135
    37       18       11.3  
Super ATR 72
    64       3       19.7  
Saab 340B
    41       41       19.3  


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Prior to the distribution, we will transfer to American all of our jet aircraft. We will enter into lease arrangements with American for the use of these active aircraft, and we will enter into a maintenance arrangement with American for us to maintain the 18 inactive ERJ-135 aircraft. The Super ATR turbo-prop aircraft are currently leased by American and subleased to Executive, and we will enter into amended sublease agreements with American for these aircraft. We will maintain ownership of our 41 Saab 340B aircraft, which are currently in storage and fully depreciated.
 
Our lease arrangements with American for the jet aircraft will terminate following the termination of the Air Services Agreement, or earlier if the applicable jet aircraft is withdrawn from the Air Services Agreement in accordance with American’s withdrawal rights. Our sublease arrangements with American for the Super ATR turbo-prop aircraft will terminate upon expiration of their respective leases, or earlier if withdrawn from the Air Services Agreement in accordance with American’s withdrawal rights or upon termination of the Air Services Agreement. Upon termination of the lease or sublease arrangements, we are required to return the aircraft to American in accordance with specified requirements. If we fail to return the aircraft to American in accordance with these requirements, we may be liable for additional payments to American, but if they are returned in better condition, we may receive an additional payment from American. As a result of our aircraft arrangement with American, upon completion of the spin-off, we will not own any of our active aircraft and will not have any residual liability for the aircraft that we operate for American.
 
Our Air Services Agreement with American.  Under the Air Services Agreement, we will initially provide regional flight operations to American for 245 regional jet aircraft and 36 Super ATR turbo-prop aircraft. For additional information, please see “Agreements with AMR and Its Affiliates — Air Services Agreement.”
 
Our Ground Handling Business
 
General.  We currently provide a comprehensive range of ramp and passenger services to American and 13 other airline customers. We have been providing ground handling services since 1984. We believe we are one of the largest providers of ground handling services in the U.S. and our more than 6,400 ground handling employees, broad geographic footprint and experience operating in a large hub environment provide us with a distinct competitive advantage in providing ground handling services to American and other airlines.
 
For the six months ended June 30, 2011, on a pro forma basis, American represented 95% of our ground handling services operating revenue, while other airlines represented 5% of our ground handling services operating revenue. Following the spin-off, we will continue to provide ground handling services for aircraft operated by us on behalf of American and for aircraft operated by American or on behalf of American by other airlines.
 
At July 1, 2011, our ground handling business:
 
  •  handled 1,619 departures per day;
 
  •  provided ground handling services at more than 100 airports;
 
  •  provided ground handling services for 14 airline customers, including American; and
 
  •  was the only provider of ground handling services to scheduled airlines at 12 of our ground handling locations.
 
Our Services.  Our ground handling services consist of passenger handling services and ramp services.
 
Passenger Handling Services.  Passenger handling services include the following:
 
  •  checking passengers’ baggage at curbside;
 
  •  providing ticket counter service, which includes helping passengers check baggage, receive boarding passes, purchase tickets, check documentation and receive flight-related information;
 
  •  providing departure gate services and managing the ticket-taking process;


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  •  assisting with passengers’ baggage-related problems such as damage, theft or mishandled bags; and
 
  •  providing wheelchair assistance.
 
We customize passenger services to meet the particular needs of an airline. For example, our employees that provide passenger services may wear the same uniforms as our customer’s employees and are trained to their standards. Passenger services customers provide individualized specifications regarding the number of employees that must be available for the handling of a given flight.
 
Ramp Services.  Ramp services include the following:
 
  •  guiding the aircraft to and from the gate;
 
  •  loading and unloading baggage and freight;
 
  •  cabin cleaning;
 
  •  de-icing; and
 
  •  providing heating, air conditioning, lavatory and water services.
 
Due to the short period of time between aircraft arrival and departure, ramp services are a critical part of ensuring on-time departures. Without experienced ramp crews and well-maintained equipment, a flight may be delayed and customers may become dissatisfied.
 
Our Ground Handling Agreement with American.  Our Ground Handling Agreement will have a term of eight years, which is a substantially longer term than a typical ground handling contract, and will provide for certain rate adjustments, which are also not typical in a ground handling contract. The services we provide and the rates at which we are compensated will be specified on an airport-by-airport basis. For additional information, please see “Agreements with AMR and Its Affiliates — Ground Handling Agreement.”
 
Customers.  We provide ground handling services to American for its mainline and regional operations. In addition, we provide these services to Air Georgian, AirTran Airways, Allegiant Air, British Airways, Continental for Continental Express, Delta for Delta Connection, Frontier Airlines, Alaska Airlines, Jazz Air, JetBlue Airways, Spirit Airlines, Sun Country Airlines and US Airways for US Airways Express. No single customer accounted for more than 5% of our pro forma ground handling services operating revenue for the six months ended June 30, 2011, other than American.
 
We generally have ground handling service contracts with each of our customers. These contracts are typically based on standard industry forms that are customized to fit the needs of each customer. Generally, our contracts are effective for a specified term and automatically renew, and our customers have the right to terminate the agreement on 60 to 90 days notice, or sooner in the case of continuing performance breaches.


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Locations.  At July 1, 2011, we provided ground handling services at the following airports:
 
(MAP)
 
Competition
 
Regional Airlines.  The airline industry is highly competitive. We compete principally with other regional airlines. Because our regional flight operations extend throughout most major geographic markets in the U.S., our competition includes nearly every other domestic regional airline that could compete to provide the same services we provide. The primary competitors to our regional flight operations include: Air Wisconsin Airlines Corporation; Comair, Inc. (owned by Delta Air Lines); Horizon Air Industries, Inc. (owned by Alaska Air Group, Inc.); Mesa Air Group, Inc.; Pinnacle Airlines Corp. and its regional airline subsidiaries; Republic Airways Holdings Inc. and its regional airline subsidiaries; SkyWest Inc. and its regional airline subsidiaries; and Trans States Airlines, Inc. Mainline carriers award contract flying to these regional airlines based upon certain criteria, including cost, financial resources, overall customer service levels relating to on-time arrival and departure statistics, cancellation of flights, other performance metrics and the overall image of the regional airline as a whole.
 
Ground Handling Services.  The ground handling industry is highly fragmented and consists of a large number of service providers. Our principal competitors include nationally operated ground handling service providers such as Airport Terminal Services, Inc., Menzies Aviation plc, Servisair, Swissport International Ltd. and Worldwide Flight Services, Inc., as well as many smaller companies that operate regionally or at individual airports. In addition, we indirectly compete with various airlines that perform a large portion of their ground handling services in-house. The principal competitive factors in this industry are price, reputation, quality of service, breadth of service and experience.


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Maintenance of Aircraft
 
To provide operational and maintenance services for our fleet of active aircraft, we have a geographically diversified network of operational and maintenance facilities that provide line, scheduled overnight and heavy maintenance. We have maintenance facilities at each of American’s hubs and certain other cities (Dallas/Fort Worth International Airport, New York’s LaGuardia Airport, John F. Kennedy International Airport, Los Angeles International Airport, Miami International Airport, Chicago O’Hare International Airport and Luis Munoz Marin International Airport in San Juan, Puerto Rico) and have significant overnight maintenance capabilities at Marquette/Sawyer International Airport, Northwest Arkansas Regional Airport, Columbus Regional Airport and Springfield-Branson National Airport and at the Eagle Aviation Services, Inc. maintenance facility at Abilene Regional Airport. With the exception of the Super ATR turbo-prop aircraft, we perform substantially all of our heavy checks at either our Marquette/Sawyer facility or our Abilene facility.
 
We also contract with third party vendors to provide all engine maintenance and some scheduled overnight and ad hoc line maintenance. Some of these engine maintenance agreements are long-term agreements on a power-by-the-hour basis with the original engine equipment manufactures and other key suppliers.
 
Training
 
We perform the majority of our flight crew training at the American Airlines Training Center in Fort Worth, Texas. Training for Executive pilots is conducted by American Eagle under a Training Certificate pursuant to Part 142 of the FAA Federal Aviation Regulations. New hire and change of position classroom training is conducted at the American Training Center. American Eagle uses two ERJ-145 simulators owned by American that are located at the American Training Center. CRJ-700, Super ATR and any additional ERJ simulator training is primarily done at the Flight Safety International (“FSI”) Training Center at Dallas/Fort Worth International Airport. Overflow from the Dallas/Fort Worth facility is handled at other FSI facilities throughout the U.S. All flight training and checking of American Eagle and Executive pilots is performed by American Eagle instructors, who are normally line qualified and represented by the Air Line Pilots Association.
 
Our flight attendants are trained in Fort Worth, Texas by line qualified flight attendants who are instructor qualified and supervised by professional instructors. The majority of annual recurrent ground school training is also conducted at the American Airlines Training Center, although recurrent training for Executive pilots is also conducted in Miami and San Juan. Ground operations employees are trained either by professional instructors or ground employees who are instructor qualified. Ground operations instructors are employed by American Eagle.
 
All mechanics and avionics specialists employed by us have necessary training and experience and hold required licenses issued by the FAA. We provide both internal and outside training for our maintenance personnel using full-time instructors and taking advantage of manufacturers’ training programs that are offered, particularly when acquiring new aircraft.
 
Intellectual Property
 
Following the spin-off, we will have a license under each of the Air Services Agreement and Ground Handling Agreement that will grant us the right to use certain American trademarks and tradenames in connection with our regional flight operations and ground handling services for American, including the use of the “American Eagle” tradename for our flying. We will also have the right to use these trademarks and tradenames at our facilities. These licenses will continue for so long as we are providing services to American and have use of the related facilities under the respective agreements. In addition, pursuant to the Information Technology Transition Services Agreement, we will be granted a license from American to continue to use certain software and other technology in connection with our regional flight operations and ground handling services businesses. See “Agreements with AMR and Its Affiliates— Information Technology Transition Services Agreement.”


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Government Regulation
 
We operate under certificates of public convenience and necessity issued by the DOT. The DOT may alter, amend, modify or suspend these authorizations if the DOT determines we are no longer fit to continue operations or if the public convenience and necessity so require. The DOT has jurisdiction to prohibit certain unfair or anti-competitive practices, to determine carrier fitness to continue operations and to mandate certain conditions of carriage. The DOT can bring proceedings for the enforcement of its regulations under applicable Federal statutes, which proceedings may result in civil penalties, revocation of certificate authority or criminal sanctions. The DOT has detailed rules affecting the operations and service of the airlines in many areas, including consumer protection, non-discrimination against passengers with disabilities, minimum insurance levels and others.
 
We also operate under air carrier certificates issued by the FAA. The FAA may suspend, amend, modify or revoke an air carrier certificate if the carrier fails to comply with the terms and conditions of the certificates or if safety in air commerce or air transportation and the public interest so require. The FAA’s regulations are primarily in the areas of flight operations, maintenance, ground facilities, transportation of hazardous materials and other safety matters. The FAA requires each airline to obtain approval to operate at specific airports using specified equipment. Under FAA regulations and with FAA approval, we have established cargo training and handling programs and a maintenance program for each type of aircraft we operate that provides for the ongoing maintenance of these aircraft, ranging from frequent routine inspections to major overhauls. The FAA enforces its regulations by the imposition of civil penalties or revocation of an air carrier certificate.
 
Based on conditions in the industry, or as a result of Congressional directives or statutes, the DOT and the FAA from time to time propose and adopt new regulations or amend existing regulations, such as the new consumer rule that limits airline tarmac delays and provides other passenger protections, which may impose additional regulatory burdens and costs on us. The new rule, which became effective in April 2010, levies heavy fines against an airline when it subjects customers on domestic flights to a tarmac delay of three hours or more without affording them the opportunity, within that timeframe, to deplane. Carriers are also now required to provide adequate food and potable drinking water for passengers within two hours of the aircraft being delayed on the tarmac and to maintain operable lavatories. Imposition of such laws and regulations on air carriers has increased, and will continue to increase, our costs of operation, and may limit our operating discretion when our mainline partners cancel flights to avoid tarmac delays, thus resulting in a negative impact to our block hours.
 
The Aviation and Transportation Security Act of 2001 (“ATSA”) federalized substantially all aspects of civil aviation security and created the Transportation Security Administration (“TSA”) under the Department of Homeland Security. Implementation of the requirements of ATSA and other security laws and regulations resulted in increased costs for airlines and passengers, as well as delays and disruptions in air travel. TSA issued regulations implementing ATSA, including requiring that we adopt an air carrier security program and subjecting us to the imposition of substantial civil penalties for the failure to comply with TSA rules or with our security program. Under the law, checked baggage must be screened by explosives detection systems, which has required us to engage in significant equipment acquisition and the implementation of facility and baggage process changes. Further implementation of the requirements of ATSA and other security laws and regulations have resulted in increased costs for airlines and passengers, delays and disruptions to air travel and reduced demand.
 
Two other security measures implemented by TSA that impact air carriers are the Secure Flight program and the proposed rule for domestic and foreign FAA-certificated aircraft repair stations. Secure Flight shifts pre-departure watch list matching responsibilities from individual air carriers to TSA and has required significant changes to the airlines’ reservations systems. Air carriers are now required to obtain additional passenger information, such as the passenger’s full name and date of birth, and the printing of boarding passes must be inhibited until the air carrier is notified by TSA that the passenger has been cleared for travel. Under the Secure Flight program, TSA expects to vet 100 percent of all domestic and international commercial flights.


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A proposed rule for domestic and foreign FAA-certificated aircraft repair stations will require repair stations to adopt a security program that includes access controls for facilities as well as aircraft and components, and restrict access by unauthorized individuals. Implementation of this rule will result in increased costs for repair stations and airlines.
 
Operations at certain airports served by us are regulated by governmental entities through allocations of “slots” or similar regulatory mechanisms which limit the rights of carriers to conduct operations at those airports. Each slot represents the authorization to land at or take off from the particular airport during a specified time period.
 
In the U.S., the FAA currently regulates the allocation of slots, slot exemptions, operating authorizations or similar capacity allocation mechanisms at Ronald Reagan Washington National Airport, LaGuardia Airport, John F. Kennedy International Airport and Newark Liberty International Airport. Our operations at these airports generally require the allocation of slots or analogous regulatory authorities. We currently have access to sufficient slots or analogous authorizations to operate our existing flights. There is no assurance, however, that we will be able to do so in the future because, among other reasons, such allocations are subject to changes in governmental policies.
 
During the maintenance of our aircraft and ground equipment, we handle and use many materials that are classified as hazardous which have the potential to generate hazardous and non-hazardous waste. The handling, processing and disposal of these materials are subject to the rules and regulations of the Environmental Protection Agency (“EPA”) and other agencies. We are currently implementing a plan in response to the recently released Airline Drinking Water Rule mandated by the EPA and Federal Drug Administration, which requires airlines to develop and implement a fleet specific aircraft water system sanitization, testing and sampling program. We are also subject to the oversight of the Occupational Safety and Health Administration concerning employee safety and health matters and to the Federal Communications Commission’s jurisdiction regarding the use of radio frequencies.
 
Federal law establishes maximum aircraft noise and emissions limits. All of our aircraft comply with currently applicable Federal noise and emissions regulations. Federal law generally preempts airports from imposing unreasonable local noise rules that restrict air carrier operations. However, under certain circumstances, the DOT allows local airport authorities to implement reasonable and nondiscriminatory local noise abatement procedures, which could impact our ability to serve certain airports, particularly during off-peak hours. Certain airports, including the major airports at Boston, Washington, D.C., Chicago, Los Angeles, San Diego, Orange County (California) and San Francisco, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. In some instances, these restrictions have caused curtailments in services or increases in operating costs, and such restrictions could limit our ability to commence or expand our operations at affected airports. Local authorities at other airports are considering, or may in the future consider, adopting similar noise regulations.
 
On September 14, 2010, the FAA issued a Notice of Proposed Rulemaking applicable to Part 121 carriers, which include American, American Eagle and Executive, to change the required amount and timing of rest periods for pilots between work assignments and modifying duty and rest requirements based on the time of day, number of scheduled segments, flight types, time zones and other factors. The industry is seeking clarification from the FAA of certain provisions of the proposed rule. If the proposed rule is not amended, there could be a material adverse impact on us.
 
Many aspects of our operations are subject to increasingly stringent Federal, state and local laws, and concerns about climate change and greenhouse gas emissions, in particular, may result in the imposition of additional legislation or regulation. Future regulatory actions that may be taken by the U.S. government, including those to address climate change or limit the emission of greenhouse gases by the aviation sector, are unknown at this time. Such legislative or regulatory action by Federal, state or foreign governments currently or in the future may adversely affect our business and financial results. See “Risk Factors — The regional airline business is subject to significant governmental regulation” for a discussion of our risks related to these regulatory actions.


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We believe that we are operating in compliance in all material respects with DOT and FAA regulations and hold all necessary operating and airworthiness authorizations and certificates.
 
Environmental Matters
 
We are subject to various Federal, state, local and foreign laws and regulations relating to environmental protection matters, including the Clean Air Act, the Clean Water Act and the Comprehensive Environmental Response, Compensation and Liability Act of 1980. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise.
 
We are, and expect in the future to be, involved in various environmental matters or remediation of environmental conditions at, or related to, properties we use or previously used. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.
 
Insurance
 
We carry insurance policies of the types customary in the airline industry and with limits we believe are adequate to protect us against material loss. Currently, we obtain this coverage through combined placements with American.
 
Following the spin-off, we will be required to obtain our own insurance coverage. Pursuant to the Transition Services Agreement, American has agreed to place our insurance in conjunction with American’s insurance portfolio through July 1, 2012 in exchange for a service fee and may continue to do so after that date. In addition, although American will pay directly or reimburse us for the cost of certain of this insurance during the term of the Air Services Agreement and Ground Handling Agreement, we will be responsible for insurance not covered by these agreements (including directors’ and officers’ liability insurance) and for any additional premium charges that may need to be paid if we commence regional flight operations for other airlines or if our actions are the cause of any such premium increase.
 
While we believe our insurance coverage is adequate to protect us against material loss, in the event of an accident, our liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear substantial losses, which could adversely impact our business.
 
Employees
 
Our relations with labor unions in the U.S. are governed by the Railway Labor Act. Under the Railway Labor Act, a labor union seeking to represent an unrepresented craft or class of employees is required to file with the National Mediation Board (the “NMB”) an application alleging a representation dispute, along with authorization cards signed by at least 35% of the employees in that craft or class. The NMB then investigates the dispute and, if it finds the labor union has obtained a sufficient number of authorization cards, conducts an election to determine whether to certify the labor union as the collective bargaining representative of that craft or class. Under the NMB’s usual rules, a labor union will be certified as the representative of the employees if more than 50% of those voting vote in favor of union representation. A certified labor union then enters into negotiations toward a collective bargaining agreement with the employer.
 
Under the Railway Labor Act, a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Either party may request that the NMB appoint a federal mediator to participate in the negotiations for a new or amended agreement. If no agreement is reached in mediation, the NMB may determine, at any time, that an impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30-day “cooling off” period begins. At the end of this 30-day period, the parties may engage in “self help,” unless the U.S. President appoints a Presidential Emergency Board (“PEB”) to investigate and report on the dispute. The appointment of a PEB maintains the “status quo” for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in “self help.” “Self help” includes, among other things, a strike by the union or the imposition of proposed changes to the collective bargaining agreement by the airline. Congress and the


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President have the authority to prevent “self help” by enacting legislation that, among other things, imposes a settlement on the parties.
 
Our relations with labor unions in Canada are governed by the Canada Labour Code. No strikes or lock-outs may lawfully occur during the term of the collective agreements, nor during the negotiations of their renewal, until a number of pre-conditions, in respect of the unions for Canadian-based employees, prescribed by the Canada Labour Code, have been satisfied.
 
Our past and continuing success depends on the ability of our employees to execute effectively on a daily basis. At July 1, 2011, we had over 13,500 employees, approximately 7,100 providing regional flight operations and 6,400 providing ground handling services. Our regional flight operations employees include approximately 2,730 pilots, 1,720 flight attendants, 1,460 mechanics and other maintenance personnel, 640 management personnel, 170 support personnel, 93 dispatchers, 66 crew schedulers, and 11 ground handling school instructors. Labor costs are a significant component of airline expenses and can substantially impact results. An important component of our business strategy is the preservation of good relations with our employees, approximately 60% of whom are represented by collective bargaining groups.
 
The following table reflects, at July 1, 2011, our principal collective bargaining agreements and their respective amendable dates:
 
             
    Approximate
       
    Number of
       
    Full-Time
      Contract
    Equivalent of
      Amendable
Employee Group
  Employees  
Representing Union
  Date
 
Pilots
  2,730   Air Line Pilots Association   January 2013
Mechanics
  1,460   Transport Workers Union   April 2012
Flight Attendants
  1,720   Association of Flight Attendants   October 2009
Dispatchers
  93   Transport Workers Union   January 2008
Ground School Instructors
  11   Transport Workers Union   April 2012
Fleet Service Clerks
  2,160   Transport Workers Union   January 2008
Canadian Ramp Agents/GSE Mechanics
  78   National Automobile Aerospace,
Transportation and General
Workers Union of Canada (CAW)
  March 2011
 
Properties
 
Following the spin-off, we will have the following significant dedicated facilities, which we will lease from third parties other than American:
 
  •  approximately 12,300 square foot maintenance hangar in Boston, Massachusetts;
 
  •  approximately 127,300 square foot maintenance hangar in Marquette, Michigan;
 
  •  approximately 23,000 square foot maintenance hangar in Springfield, Missouri;
 
  •  approximately 23,000 square foot maintenance hangar in San Juan, Puerto Rico;
 
  •  approximately 90,500 square foot maintenance hangar in Bentonville, Arkansas;
 
  •  approximately 77,700 square foot maintenance hangar in Columbus, Ohio;
 
  •  approximately 90,800 square foot maintenance hangar and an approximately 36,000 square foot office facility in Fort Worth, Texas; and
 
  •  approximately 232,400 square foot maintenance hangar in Abilene, Texas.