June 11, 2006, 2:21AM
Have jets, will bargin
Dispute over costs with Continental leaves a partner looking for business
By BILL HENSEL JR.
Copyright 2006 Houston Chronicle
ExpressJet Airlines will be flying in some dramatically different directions soon.
To be exact, it has 69 regional jets seeking new routes — a quarter of the Houston company's fleet — because starting next year those jets no longer will be hauling passengers for Continental Airlines.
"It's obviously a difficult time that we've got to kind of work through," Jim Ream, ExpressJet's chief executive officer, told analysts recently.
The change was forced by a falling-out between ExpressJet and its former corporate parent after an acrimonious round of negotiations. Those talks ended with the two sides many millions of dollars apart over how much Continental should pay ExpressJet, which does business as Continental Express, to fly routes using those jets.
That break was announced about six months ago. Since then, ExpressJet's leaders have been seeking new ventures that could decide the fate of the airline, which employs about 6,800.
They had to choose between surrendering the planes and operating on a much smaller basis, or keeping them and finding paying customers to cover the higher cost of leasing the planes .
To Ream, giving up that many jets looked like the worst of the options.
"It's just difficult to think about shrinking 25 percent of what you do for a living just because another company decides that you should do so," said Ream, a former Continental executive, during the conference call with analysts.
Not keeping the aircraft also could have led to a corporate death spiral from a competitive standpoint, he said.
The plunge in the company's stock after Continental made the announcement on Dec. 28, showed the gravity of the situation from Wall Street's perspective.
ExpressJet shares, which had been trading at $10.63 the day before the announcement, fell to $8.32 the day after the news. They closed Friday at $5.32.
Continental said it withdrew the 69 aircraft because it believed the rates ExpressJet charged were far above the market. It showed the divide that's developed since Continental spun off the carrier in 2002.
Continental awarded the business to Chautauqua Airlines, a subsidiary of Republic Airways. But that deal assumed ExpressJet would be releasing the aircraft. Since it did not turn over the planes, Chautauqua is out of the picture.
When asked what Continental's plans are, a spokeswoman essentially said it is leaving its options open.
"We believe there are ample regional jets and other aircraft to replace this capacity at lower costs," Continental spokeswoman Julie King said. "We have the time and flexibility to pursue a number of options for our future regional flying needs."
New Year's goal
By Jan. 1, ExpressJet, which has a fleet of 270, expects to have found some ways to redeploy the 69 planes that it had been flying for Continental.
But reaching this goal is complicated by the fact that at the moment there is an oversupply of the small jets — allowing major airlines to drive hard bargains.
Ream isn't ready to reveal specifics of any deals in the works, but he noted the carrier is focused on several areas.
One possibility Ream cited would be approaching other big carriers with an offer to supplement their service. He said the majority of the airplanes are longer-range and indicated ExpressJet has had positive conversations with potential clients.
Another possibility would be flying some aircraft in another country. Networks in many countries are still developing, so there are opportunities, he said.
ExpressJet also is discussing using the planes for corporate charters.
Still another possibility is offering connecting air service between smaller communities that lack good service options.
"It is very fluid," Ream said. "There is not one solution that is going to take all 69 aircraft."
Different names, places
For ExpressJet, this marks a risky break from the past. The 69 aircraft in question will have to operate under a different name out of different airports.
The aircraft in question are made by Embraer and are 50-seaters. Twenty-five of the aircraft are the ERJ-145LR, which have a range of nearly 1,800 miles. The other 44 are the ERJ-145XR model, which is longer-range, able to fly about 2,300 miles.
Aviation consultant Michael Boyd of the Boyd Group says recent history hasn't been kind to regional carriers that try to make a go on their own.
"These entities can't make money on their own. It's been tried," Boyd said. "They are attached to American or Continental, feeding them traffic."
Airline analyst Ray Neidl of Calyon Securities said of the four scenarios the carrier laid out, some are less attractive than others.
"I think he kind of admitted the company faces major challenges going forward," Neidl said.
On the other hand, ExpressJet has had good cash flow and large cash reserves, the analyst noted.
Any new lines of business will need to bring in enough revenue to cover sky-high jet fuel prices.
Each of the possible businesses under consideration at ExpressJet come with their own challenges.
For example, operating as a foreign carrier elsewhere would mean it would have to meet all the criteria for operating in that country.
"It is very complex from a regulatory standpoint," Ream acknowledged, noting that the carrier already has employees with expertise in such areas. ExpressJet also would bring in outside experts, he added.
ExpressJet already flies to cities in Mexico, but it does so as a U.S. carrier.
ExpressJet already had been diversifying, investing in businesses like Wing Aviation. ExpressJet bought 49 percent of that full-service aviation company for $16 million in June of 2005. Wing specializes in aircraft charter and management, as well as major airplane maintenance.
Calyon noted in a March report that that ExpressJet made acquisitions last year that will offer it new business opportunities "that we believe represent attractive growth areas."
Ream said he is optimistic that ExpressJet will be able to deploy the aircraft successfully.
"We feel that there's a reasonable chance that we can come out as a stronger organization as a result of Continental's decision," Ream said.
[email protected]
Have jets, will bargin
Dispute over costs with Continental leaves a partner looking for business
By BILL HENSEL JR.
Copyright 2006 Houston Chronicle
ExpressJet Airlines will be flying in some dramatically different directions soon.
To be exact, it has 69 regional jets seeking new routes — a quarter of the Houston company's fleet — because starting next year those jets no longer will be hauling passengers for Continental Airlines.
"It's obviously a difficult time that we've got to kind of work through," Jim Ream, ExpressJet's chief executive officer, told analysts recently.
The change was forced by a falling-out between ExpressJet and its former corporate parent after an acrimonious round of negotiations. Those talks ended with the two sides many millions of dollars apart over how much Continental should pay ExpressJet, which does business as Continental Express, to fly routes using those jets.
That break was announced about six months ago. Since then, ExpressJet's leaders have been seeking new ventures that could decide the fate of the airline, which employs about 6,800.
They had to choose between surrendering the planes and operating on a much smaller basis, or keeping them and finding paying customers to cover the higher cost of leasing the planes .
To Ream, giving up that many jets looked like the worst of the options.
"It's just difficult to think about shrinking 25 percent of what you do for a living just because another company decides that you should do so," said Ream, a former Continental executive, during the conference call with analysts.
Not keeping the aircraft also could have led to a corporate death spiral from a competitive standpoint, he said.
The plunge in the company's stock after Continental made the announcement on Dec. 28, showed the gravity of the situation from Wall Street's perspective.
ExpressJet shares, which had been trading at $10.63 the day before the announcement, fell to $8.32 the day after the news. They closed Friday at $5.32.
Continental said it withdrew the 69 aircraft because it believed the rates ExpressJet charged were far above the market. It showed the divide that's developed since Continental spun off the carrier in 2002.
Continental awarded the business to Chautauqua Airlines, a subsidiary of Republic Airways. But that deal assumed ExpressJet would be releasing the aircraft. Since it did not turn over the planes, Chautauqua is out of the picture.
When asked what Continental's plans are, a spokeswoman essentially said it is leaving its options open.
"We believe there are ample regional jets and other aircraft to replace this capacity at lower costs," Continental spokeswoman Julie King said. "We have the time and flexibility to pursue a number of options for our future regional flying needs."
New Year's goal
By Jan. 1, ExpressJet, which has a fleet of 270, expects to have found some ways to redeploy the 69 planes that it had been flying for Continental.
But reaching this goal is complicated by the fact that at the moment there is an oversupply of the small jets — allowing major airlines to drive hard bargains.
Ream isn't ready to reveal specifics of any deals in the works, but he noted the carrier is focused on several areas.
One possibility Ream cited would be approaching other big carriers with an offer to supplement their service. He said the majority of the airplanes are longer-range and indicated ExpressJet has had positive conversations with potential clients.
Another possibility would be flying some aircraft in another country. Networks in many countries are still developing, so there are opportunities, he said.
ExpressJet also is discussing using the planes for corporate charters.
Still another possibility is offering connecting air service between smaller communities that lack good service options.
"It is very fluid," Ream said. "There is not one solution that is going to take all 69 aircraft."
Different names, places
For ExpressJet, this marks a risky break from the past. The 69 aircraft in question will have to operate under a different name out of different airports.
The aircraft in question are made by Embraer and are 50-seaters. Twenty-five of the aircraft are the ERJ-145LR, which have a range of nearly 1,800 miles. The other 44 are the ERJ-145XR model, which is longer-range, able to fly about 2,300 miles.
Aviation consultant Michael Boyd of the Boyd Group says recent history hasn't been kind to regional carriers that try to make a go on their own.
"These entities can't make money on their own. It's been tried," Boyd said. "They are attached to American or Continental, feeding them traffic."
Airline analyst Ray Neidl of Calyon Securities said of the four scenarios the carrier laid out, some are less attractive than others.
"I think he kind of admitted the company faces major challenges going forward," Neidl said.
On the other hand, ExpressJet has had good cash flow and large cash reserves, the analyst noted.
Any new lines of business will need to bring in enough revenue to cover sky-high jet fuel prices.
Each of the possible businesses under consideration at ExpressJet come with their own challenges.
For example, operating as a foreign carrier elsewhere would mean it would have to meet all the criteria for operating in that country.
"It is very complex from a regulatory standpoint," Ream acknowledged, noting that the carrier already has employees with expertise in such areas. ExpressJet also would bring in outside experts, he added.
ExpressJet already flies to cities in Mexico, but it does so as a U.S. carrier.
ExpressJet already had been diversifying, investing in businesses like Wing Aviation. ExpressJet bought 49 percent of that full-service aviation company for $16 million in June of 2005. Wing specializes in aircraft charter and management, as well as major airplane maintenance.
Calyon noted in a March report that that ExpressJet made acquisitions last year that will offer it new business opportunities "that we believe represent attractive growth areas."
Ream said he is optimistic that ExpressJet will be able to deploy the aircraft successfully.
"We feel that there's a reasonable chance that we can come out as a stronger organization as a result of Continental's decision," Ream said.
[email protected]
