SKYW Cuts CO Deal Based on XJT Purchase

In a measure of just how cutthroat the regional airline industry has become, SkyWest announced it cut a deal with Continental Airlines for a new Capacity Purchase Agreement. However, it is contingent on the acquisition of Continental Express ExpressJet Airlines, which rejected the offer on Friday. Related Story
The deal would have paid XJT $3.50 per share. The value of the deal is based on 51.9 million shares outstanding as of March 10, according to Reuters data. ExpressJet shares were up 84 cents to $2.93 in morning trade last Friday on the New York Stock Exchange. SkyWest shares rose 10 cents to $17.26.
The move came after an April 7 letter from Continental to XJT that unless it could finally cut a deal on the rate for their Capacity Purchase Agreement tantamount to the savings represented by SkyWest, another 51 aircraft would be taken from the regional partner when its current agreement becomes amendable on December 31, 2009. Their current contract terminates the following year and the major carrier has already told XJT that it does not intend to extend their relationship meaning that all 205 aircraft it now operates for Continental will go to another carrier. XJT lost 25 percent of its Continental contract to Republic last year. Express Jet, which has long been negotiating a new rate with Continental, is holding out for a higher price owing to the fact that Continental holds a golden share in its former wholly-owned subsidiary.
In SkyWest’s statement on the deal it said that its proposal was not subject to a financing condition, but was subject to the completion of due diligence, certain clarification or amendments to the collective bargaining agreement between ExpressJet and its pilots and certain other customary approvals and conditions. The airline said it is disappointed that ExpressJet's Special Committee rejected SkyWest's premium proposal. It also said that it is dismayed that ExpressJet did not honor SkyWest's request to begin due diligence at the time it made its proposal. SkyWest intends to review its alternatives which could include, among other things, altering or withdrawing its proposal and/or not participating in any formal process established by the Special Committee and its advisors. ExpressJet, in its announcement last Friday, did not completely foreclose a deal but held out the promise that a higher per-share price could do the trick.
"We believe our offer is consistent with our strategy of pursuing viable opportunities to enhance shareholder value, while also offering value to Continental through a new code-share relationship" commented Bradford R. Rich, SkyWest Executive Vice President and Chief Financial Officer. "Based upon the information available to us, and subject to the completion of due diligence which we hope to undertake promptly, we believe a transaction can be structured with ExpressJet which would be accretive to our shareholders."
Jerry Atkin, SkyWest's chief executive, said in a letter to ExpressJet officials that the offer constituted a "full and fair price" for the ExpressJet shares. Indeed, he foreshadowed these events during an interview with Regional Aviation News when he said any regional with an termination date for capacity purchase agreements in the next couple of years is at risk. The earliest termination date for SkyWest relates to its United agreement in 2011. "We believe that our proposal would be in the best interests of ExpressJet and its stockholders, particularly given the uncertainty in the airline sector, the high price of oil and, as outlined in your public filings, the risks of your business related to your relationship with Continental," Atkin wrote.
ExpressJet, which mainly operates regional flights under contract to Continental Airlines and Delta Air Lines, said the special committee has begun a full review of the company's available alternatives. The review will include discussions with SkyWest and other potentially interested parties about the possible acquisition of the company at a higher price, as well as discussions with Continental about a new capacity purchase agreement, ExpressJet said. Republic Holdings could be interested since it won XJT’s business but SkyWest will be aggressive since it has had a Continental partnership in its sights for some time.