ExpressJet Pulling Down P-T-P Fleet

After bad fourth quarter results, ExpressJet (XJT) continues to adjust its point-to-point flying, pulling it down to ultimately 31 or 32 aircraft as fuel prices force pressure on developing markets, according to CEO Jim Ream, who reported the company’s fourth quarter loss of $31.7 million to investors...

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After bad fourth quarter results, ExpressJet (XJT) continues to adjust its point-to-point flying, pulling it down to ultimately 31 or 32 aircraft as fuel prices force pressure on developing markets, according to CEO Jim Ream, who reported the company’s fourth quarter loss of $31.7 million to investors last week. However, Ream emphasized that given the speed at which the company launched its point-to-point service and the fact that it is only in its second full quarter, he feels optimistic.
For their part, investors closely questioned the wisdom of the point-to-point operation in the current economic and fuel environment with one pointedly asking what will keep the airline from filing Chapter 11. Ream countered that the majority of its fleet was in Continental Express with another three aircraft from the point-to-point operation having been moved from branded to the Delta pro-rate operation, expanding that service to 11 aircraft and six new communities out of Los Angeles. He also said fuel was difficult for all aircraft and the 50-seaters may be a solution for rising costs of mainline narrow bodies. In addition, XJT was planning to finally move up the number of aircraft for its corporate operation to 15 as demand increases. It is part of the new Virgin Charter Program launched recently. Related Story ExpressJet will also provide short-term service later this month for United Airlines as United Express.
He reported that the airline’s ability to sell had not improved as early as planned at the beginning of the fourth quarter but was finally spooling up by the end of that quarter and in the first quarter, which he predicted would be as bad as the fourth quarter. He also pointed to the second and third quarters as being positive.
“We are increasing our visibility and starting to get better information to work with,” he said. “It looks as if we are stimulating market demand and will exceed the third quarter by 50 percent. We are finally giving travel agents the additional functionality they need but the delay lost the holiday traffic season. We are now on Expedia Corporate Travel and Saber. As we brought on functionality we have regained market share. On the demand side, we are continuing to monitor markets, impose schedule changes as we endeavor to match demand and supply. To that end we are pulling down seven percent. On our branded operation, if we can match supply and demand and find the right mix of passengers, even at $100 a barrel, the 50 seater will do as well with any other aircraft. I’m not sure what aircraft I want at $100 a barrel, but I don’t think the 50 seater is any more vulnerable than any other aircraft.”
The optimistic overview came shortly before JP Morgan Analyst Jamie Baker predicted collective industry losses this year could be $4 billion in the best-case scenario and $9 billion in the worst. Airline revenues, he said, would be hit by the combined rising fuel and falling demand owing to the economy, preventing further fare increases to cover fuel hikes.
The average fare for ExpressJet’s branded operation is in the upper 90s, said Ream, adding that competition has not been so noticeable as to make it one of the bigger issues. “We have found a niche that we can fill, and have the right aircraft to do it,” he said. “On balance, most of networks are concentrating on own strengths and not paying attention to us as might have been the case when we first launched into this. We’ve tried to be a good competitor with fare levels that make sense and have not tried to drive load factor to a point we didn’t end up driving any value from RASM stand point. We think we bring value to the market pairs that is difficult to replicate if you drag folks out over a connecting hub. We’ve found a little bit of home and are not dealing with a lot of competitive pressures.”
He reported being pleased with the March bookings, the month in which it marks its first anniversary and stressed that ExpressJet is generating more money operating the aircraft than if they were grounded. “As we approach the first anniversary we have made a lot of progress,” he said, adding the airline missed its targets for its Continental Express operation.
He noted the enormous difficulty in taking 42 aircraft and deploying them as quickly as it did. “That hasn’t been done in the industry before,” he said. “Now we are seeing other opportunities where we don’t have as much spooling which takes a bit of pressure off us. We are seeing points of strength and other markets that we’re not sure going to be successful in fuel environment. But all these things are fixable. We have blank sheets to move assets around as we see opportunities working for other carriers or changing frequencies. We have the flexibility to work through our portfolio of aircraft. In addition 80 percent of our operation is in Continental. When we see how much capital we will need in ’08 and other factors it is not a bad spot to be in. When we start looking at where the bookings are in the second quarter and how we have improved our presence in those communities, there is a lot to be happy about.”

XJT Results
For the full year, ExpressJet reported a loss of $70.2 million or $1.31 per share. Excluding special charges, ExpressJet reported a fourth quarter loss of $27.6 million or $0.52 per share and a full year loss of $66.1 million or $1.23 per share. ExpressJet's 2007 results reflect the transition of 69 aircraft from its capacity purchase agreement with Continental Airlines to three different types of flying. ExpressJet spent $13.5 million in transition expenses and $27.4 million in capital to launch these new segments.

Operational Overview
In the fourth quarter, ExpressJet operated 215 aircraft under the contracts with Continental and Delta Air Lines and generated 2.0 billion revenue passenger miles and 185,213 block hours across both systems. ExpressJet expects to continue operating 215 aircraft under these contracts throughout 2008.
For the fourth quarter, ExpressJet operated nine aircraft within its charter division. The charter business expanded its customer base by adding new long-term agreements and increasing the volume of ad-hoc charter activity. Also in the quarter, the company provided regional flying for Frontier Airlines before Frontier’s regional subsidiary Lynx Aviation was launched.
In the branded segment, which includes operations branded as ExpressJet Airlines and a pro-rate agreement with Delta, the company ended the fourth quarter with 506 million revenue passenger miles and a load factor of 61 percent. Fourth quarter branded segment revenue per available seat mile (RASM) increased 5.7 percent versus the third quarter despite the typical industry trend of diminished fourth quarter revenues.
"While we saw steadily improving RASM performance in the quarter, our second full quarter of branded operations, we still took action on some markets where we perceived better opportunities to expand our partnership with Delta in Los Angeles,” explained Ream. “During the quarter, three aircraft were removed from ExpressJet branded flying and re-deployed to pro-rate flying reducing average daily departures from 220 to 200. In response to higher fuel prices and a slowing economy, ExpressJet’s branded flying will be further reduced to 172 daily departures starting April 1.”
Improvements to the reservation system implemented as of March 10, include refund and exchange functionality, direct or interactive selling capabilities, and advance seat assignments within global distribution selling systems for travel agents. ExpressJet expects to implement additional reservation system improvements, including interline and code-sharing capabilities during 2008, broadening its overall sales penetration.
"As these system improvements have been incorporated and with the ongoing changes to the branded schedule, we have been encouraged by the level of bookings for the Spring and our ability to continue to revenue manage our average fare performance," added Jim Ream.

Financial Overview
ExpressJet continues to negotiate 2008 rates for its Continental capacity purchase agreement. Under the current agreement structure, ExpressJet is reimbursed at cost plus a 10 percent operating margin. In addition, ExpressJet approached Continental to restructure the agreement by reducing Continental's cost for service in exchange for relief on certain contractual terms and expects to continue these discussions along with the 2008 rate setting discussion.
ExpressJet ended 2007 with $214 million in cash and cash equivalents, including $24.8 million in restricted cash. During the fourth quarter, Holdings purchased $8 million of its common stock and $2.5 million in debt under its previously announced securities repurchase program. The total remaining in the program, after accounting for purchases made to date, is $9.8 million. ExpressJet is not currently purchasing additional securities under this program.
For the branded segment, ExpressJet is currently contracted for 85 percent of its expected first half 2008 fuel needs at $2.40 per gallon.
Capital expenditures totaled $5.1 million for the fourth quarter 2007 compared to $12.1 million during the same period in 2006. Capital expenditures for the full year 2007 totaled $48.9 million, consistent with the guidance provided in January 2007, and represented the majority of expenses associated with infrastructure and technology projects to replace services previously provided by Continental and implement the tools necessary for all types of flying. ExpressJet anticipates capital expenditures for 2008 to be between $15-20 million.