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Monday, January 29, 2007

XJT To Launch New Point-To-Point Service Next Week

In announcing the $22.8 million in fourth quarter income and $92.6 million in year-end results, ExpressJet (XJT) is keeping investors and observers on tenterhooks as to the details of its new, point-to-point, branded services, scheduled to be unveiled Feb 1 when ticket sales will begin. The plans encompass flights in the West, Midwest and Southeast. XJT also said it is working on a new capacity purchase agreement that would require 10 Embraer (ERJ) EMB-145XR aircraft and expects to complete these negotiations during first quarter.

The first flight of its band of 50-seat jets it is devoting to its point-to-point experiment, will launch April 2, rolling out the 24 new cities in April and May. President and CEO Jim Ream said XJT is going back to basics and acting on data showing where people are traveling today. He wants to prove with the right aircraft, the right markets and the right company there are opportunities outside of a network. At the same time, he may ultimately fulfill the promise of the regional jet to offer passengers more convenient service. Indeed, he even indicated that the network will have a "pre-deregulation, point-to-point look to it."

"We need to acknowledge we're in the airline business," he said, adding while contract services are good, "you can get trapped in contract services and that is a difficult position to be in with an ever-changing industry. We expect to have a closer relationship with the local community by taking advantage of our size. With 80% of our fleet committed to capacity purchase agreements, allocating 20% into markets that offer more strategic control and a greater potential for future growth is the right mix for ExpressJet."

The shadow of Independence Air loomed large in investors' minds during the conference last week, as they questioned how this differed from the FlyI business model and how XJT expected to succeed where it failed. Ream indicated FlyI had no other businesses on which to rely while it developed. He also said it was a low-cost carrier, while XJT would be charging market fares for its new service.

"This is obviously developmental in nature," he said. "But we are offering service where there is no service today. We also do not plan to offer too many seats in any given market." He alluded to the experiment, CAlLite, which tried small-city, point-to-point service with mainline jets. He also said XJT chose cities to minimize the chance of a competitive reaction by major carriers, something that figured in FlyI's failure. While FLYI used the 50-seat aircraft as well, it used a hub-and-spoke system which overloaded capacity and increased costs.

The schedules for 29 of its aircraft will be uploaded on its website on February 1 with the balance completed by mid February. It expects to offer 59 individual market pairs, offering 224 daily flights at points where there is currently no non-stop service. Despite many investor questions, XJT would only say that the network would make sense once they reviewed it after schedules are posted on their web site.

On December 31, ExpressJet Airlines' new Corporate Aviation division operated its inaugural charter flight and, to date, has flown 205 segments and 276 block hours. Six aircraft are currently operating in the division, with plans to grow the charter fleet to 15. XJT's business will also devote 205 of its 274 aircraft to its Continental capacity purchase agreement.

This year, XJT has a $45 million capital plan, 35 percent of which will go toward upgrading its LR fleet and 15 percent to completing the development of its IT infrastructure, expected in the first quarter. Finally, 30 percent is for start up costs for its new service. Ream also indicated that, despite the loss of some of its Continental Express cities to Chautauqua, XJT will continue providing airport operations for them.

It is solely focused on developing its new charter and airline businesses but did not discount the possibility that it would purchase a related maintenance business some time in the future. "We are encouraged by the amount of third-party work we've had," said Ream, who responded to a question about purchasing another regional that there was too much on the XJT plate now to consider it.

ExpressJet turned in good operating results during the quarter as evidenced by a 100% completion rate on eight days during the busy holiday season and ended the quarter with a total controllable completion factor of 99.9%, excluding cancellations for weather and air traffic control. For the fourth quarter, the controllable completion factor was 99.9% and the overall completion factor was 97.1%.

Fourth quarter operating revenue increased 5.1% to $425.8 million, versus the year-ago period. It also grew capacity 5.8% to 3.3 billion available seat miles. Revenue passenger miles were up 7.4%, resulting in a 1.2 point year-over-year increase in load factor to 77.3%. For the year 2006, ExpressJet carried over 18 million passengers, 13% more than in 2005, and operated an average of over 1,300 daily departures.

ExpressJet and Continental (CAL) have been unable to agree on rates for 2007 and are submitting their disagreements to binding arbitration as dictated by their capacity purchase agreement. The airline expects a hearing on the subject and a decision by the arbitration panel in the late second or early third quarter. ExpressJet will continue to be paid under the 2006 block-hour rates during the arbitration and expects the decision, setting the revised rate structure, to be retroactive to January 1, 2007. Continental is unable to remove any more aircraft from its partnership with Express Jet for another three years.

ExpressJet's fourth quarter 2006 operating income reflected a 7.9% operating margin, down from the 9.8% for the fourth quarter 2005. For the fourth quarter, it had a 10% operating margin under its agreement with Continental, but expenses not covered by this agreement for items related to the company's diversification and for back-office infrastructure reduced the overall consolidated margin.

ExpressJet ended the fourth quarter 2006 with $302.9 million in cash and cash equivalents, including $11.2 million in restricted cash.

For the year ended December 31, 2006, ExpressJet's operating income reflected an 8.4 percent operating margin, compared to 10 percent during the prior year. For the full year, ExpressJet's quarterly results exceeded the contractual operating margin band of 10 percent in its CAL capacity purchase agreement, leading to a total rebate of $7.3 million to Continental, versus the $23.4 million rebated during 2005. More

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