It is the fly in the ointment of the American Airlines-US Airways merger, which so far has generally gone well. Doug Parker, the former US Airways chief who became the CEO of the new American Airlines when the mega-merger closed late last year, is faced with a dilemma that dogged previous American management for years: What to do with American’s huge regional subsidiary, Envoy Air?

Parker has told me on two different occasions this year that American has no plans to divest Envoy. But American management is clearly frustrated with the carrier formerly known as American Eagle. American needs the lift Envoy provides, but the regional’s labor situation (in particular, its pilots’ contract) makes it impossible to grow Envoy or even, it would appear, manage it so that it smoothly compliments mainline American.

Envoy is somewhat of an anomaly in the US market. Most of the country’s regional airlines, and especially the larger ones, are independently owned even as they provide lift for mainline airlines under capacity purchase agreements (CPAs). But Envoy, with a fleet of more than 250 aircraft serving over 150 destinations and around 14,000 employees, is wholly owned by American.

Prior to the US Airways merger taking shape, the previous American management team was set on selling or spinning off Envoy (then Eagle), which it considered to be too unwieldy of a subsidiary.

Former American Eagle CEO Dan Garton said that when American entered Chapter 11 bankruptcy protection in November 2011, it was “60-90 days away” from divesting Eagle. “The stars and the moon were lined up [for a divestiture] and bankruptcy was the sole reason it stopped,” he said in May 2012. American had planned to move forward with divesting Eagle when it exited Chapter 11.

The plan was for a standalone Eagle to continue providing about two-thirds of American’s regional lift. But American would be relieved of the burden of directly managing Eagle and Eagle would be free to pursue CPAs with other airlines where it made sense.

Following the merger, Parker decided to keep Eagle in the fold (it was renamed Envoy to avoid confusion with the “American Eagle” brand now being applied to all of American/US Airways regional flying, which post-merger is being handled by 10 regional airlines including Envoy). He thought he had started solving the Envoy problem early this year by negotiating an amended, 10-year labor contract with Air Line Pilots Association (ALPA) representatives of Envoy’s pilots.

Envoy’s fleet is dominated by 50-seat Embraer jets and its largest aircraft is the 65-seat Bombardier CRJ700. The pilots’ contract doesn’t allow for larger aircraft. The deal Parker struck with ALPA would have allowed Envoy to operate bigger aircraft; in particular, American wanted to place new 72-seat E-175s with Envoy.

But by a 70%-30% margin, Envoy’s pilots rejected ratification of the deal. That forced American to start placing E-175s with other regional carriers. And now American, noting the lack of a stable labor deal enabling for growth and fleet modernization, has announced it will take at least 50 E-145s—the heart of Envoy’s fleet—and move the aircraft to other carriers, including Trans States Airlines, which is not an American subsidiary. The E-145 transfers will begin next year. Rather than growing, Envoy is rapidly shrinking.

Both American management and Envoy’s ALPA leadership admit that pilots are fleeing Envoy and new flight deck crew members are not eager to join the carrier. American said the E-145 transfers are necessary because there simply won’t be enough Envoy pilots to fly the 50-seat jets.

American SVP-regional carriers Kenji Hashimoto said in a letter to Envoy employees that “pilots want to work for carriers that are actively growing and expanding their fleets. Without a cost-effective pilot agreement in place, Envoy will not secure new jets and faces challenges in recruiting new pilots without the promise of a renewed fleet.”

Following the E-145 transfer announcement, Sam Pool, ALPA’s Envoy master executive council chairman, wrote in a memo to Envoy pilots that “the harsh fact is that Envoy is currently losing pilots … as our colleagues seek more rewarding careers elsewhere.”

Pool warned the Envoy pilots that their unwillingness to ratify a new labor contract may be self-defeating. Yes, he wrote, concessions would be required in a new labor deal, but “the reality is that other pilot groups in our segment of the industry have demonstrated their willingness to accept concessions in exchange for new and larger aircraft, and have subsequently agreed to reduce the pilot costs. If we wish to compete in this market, we simply have no choice but to recognize that reality and decide a course of action.”

The problem for American is that, while it might like to shed Envoy, it’s hard to see how that could happen at this point. The shrinking regional is diminishing in value as an asset. I can’t imagine a company wanting to buy it directly, and it’s hard to see much capital being raised via a spinoff. So Parker and his team are stuck with Envoy for the time being. Look for him to continue pressing ALPA for a concessionary labor deal that would lower Envoy’s costs, enable the addition of larger aircraft to the carrier’s fleet and allow American to at least get its regional affiliate in good enough shape to interest possible buyers/investors.