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December 29, 2005 10:00 AM ET
ExpressJet's Wings Clipped
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It sounded too good to be true, and, as is usually the case, it was.
When my fellow Fool Richard Gibbons described the extreme undervaluation of Continental Airlines' (NYSE: CAL) regional carrier ExpressJet Holdings (NYSE: XJT) earlier this month, I have to admit to a bit of drooling. Double-digit revenue growth in each of the past five years, you say? And double-digit profits growth predicted for the next five years? All for sale at the low, low price of 6 times earnings?
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Zap!
And just like that, not two weeks after Richard's column posted, those prophetic words struck home. Yesterday, pricing negotiations between Continental and ExpressJet collapsed. Continental announced that it will cut its purchases of capacity on ExpressJet flights by 25% by 2007, and begin seeking bids from rival regional carriers to replace the canceled ExpressJet capacity. In the wake of this announcement, ExpressJet shares tumbled 22% in Wednesday trading, but I suspect only half of that damage was done by the capacity cuts.
The other half likely stems from the implied threat that Continental made in discussing the 75% of ExpressJet's business that Continental has not cut -- yet. Said Continental: "If ExpressJet is able to lower its costs to a competitive level over time, we want them to continue flying the remaining aircraft for us."
Translation: "Either slash your prices and give up that hefty profit margin, or we're not going to stop at 25%."
Or, if you prefer your translation in rhyme, "If y'all don't play ball, we're prepared to take it all."
So yesterday, ExpressJet received the boardroom equivalent of a bloody horse head under its sheets. It suffered a body blow to its business. This business will not be given back if it now accedes to Continental's demands. ExpressJet basically has to accept the injury, accept the added insult, and lower its prices -- or else face the possibility of losing the source of essentially all of its revenue. Lucky for me, Richard and his co-team members at Motley Fool Inside Value were there to highlight the risks, as well as the potential for ExpressJet. To them, I say, thank you, Inside Value. You just saved me a bundle of cash.
Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities at www.foolanthropy.com.
Fool contributorRich Smithdoes not own, nor is he short, shares of either company named above. He's not a member of theInside Value team, either, although he follows their work religiously, for reasons that should now be obvious. If you'd like to benefit from Inside Value's insights, just click here for a 30-day free trial.
December 29, 2005 10:00 AM ET
ExpressJet's Wings Clipped
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It sounded too good to be true, and, as is usually the case, it was.
When my fellow Fool Richard Gibbons described the extreme undervaluation of Continental Airlines' (NYSE: CAL) regional carrier ExpressJet Holdings (NYSE: XJT) earlier this month, I have to admit to a bit of drooling. Double-digit revenue growth in each of the past five years, you say? And double-digit profits growth predicted for the next five years? All for sale at the low, low price of 6 times earnings?
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Zap!
And just like that, not two weeks after Richard's column posted, those prophetic words struck home. Yesterday, pricing negotiations between Continental and ExpressJet collapsed. Continental announced that it will cut its purchases of capacity on ExpressJet flights by 25% by 2007, and begin seeking bids from rival regional carriers to replace the canceled ExpressJet capacity. In the wake of this announcement, ExpressJet shares tumbled 22% in Wednesday trading, but I suspect only half of that damage was done by the capacity cuts.
The other half likely stems from the implied threat that Continental made in discussing the 75% of ExpressJet's business that Continental has not cut -- yet. Said Continental: "If ExpressJet is able to lower its costs to a competitive level over time, we want them to continue flying the remaining aircraft for us."
Translation: "Either slash your prices and give up that hefty profit margin, or we're not going to stop at 25%."
Or, if you prefer your translation in rhyme, "If y'all don't play ball, we're prepared to take it all."
So yesterday, ExpressJet received the boardroom equivalent of a bloody horse head under its sheets. It suffered a body blow to its business. This business will not be given back if it now accedes to Continental's demands. ExpressJet basically has to accept the injury, accept the added insult, and lower its prices -- or else face the possibility of losing the source of essentially all of its revenue. Lucky for me, Richard and his co-team members at Motley Fool Inside Value were there to highlight the risks, as well as the potential for ExpressJet. To them, I say, thank you, Inside Value. You just saved me a bundle of cash.
Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities at www.foolanthropy.com.
Fool contributorRich Smithdoes not own, nor is he short, shares of either company named above. He's not a member of theInside Value team, either, although he follows their work religiously, for reasons that should now be obvious. If you'd like to benefit from Inside Value's insights, just click here for a 30-day free trial.
