Last week was a busy one for ExpressJet Holdings, Inc. (XJT). In addition to following Mesa's lead in trying to renegotiate debt, it reached an accord with Continental on a new, reduced rate, seven-year capacity purchase agreement (CPA), even as it continued to explore its strategic options resulting from an unsolicited bid from SkyWest, Inc to acquire the company as part of its own CPA with Continental. In April, Continental told XJT that it would remove another 51 aircraft in December 2009 if the two failed to reach agreement. Related Story

XJT/CO Agreement
XJT gains the right to return aircraft now used in non-Continental operations and will return up to 39 Embraer 50-seat regional jets, It is now considering cutting back both branded and charter operations as part of an effort to aggressively reduce costs in response to the new agreement and the fuel crisis. Continental plans to add the returned aircraft to the new agreement and withdraw from the agreement up to 30 of its Embraer 37-seat regional jets currently flown by ExpressJet for Continental. Continental will then sublease or ground all of the withdrawn Embraer 37-seat regional jets to better align regional capacity with current market conditions. Continental also announced that entire Continental Express capacity will drop by 4.1 percent in the fourth quarter and between 5.4 percent and 7.4 percent in 2009, according to Continental bulletin to employees released yesterday. (See related story below.) During the third quarter, Express partners will fly 1,425 departures, up 3.6 percent from the year-ago period. The company said that several successful fare increases have not covered the rising fuel costs.

Airline analysts project that capacity cuts will put airlines at the same capacity as they had in 1998 or 1999, wiping out a decade of legacy growth.

The new XJT/CO agreement reduces the rent Continental charges ExpressJet on 30 other regional jets that ExpressJet will retain for seven years to fly at its own revenue risk. The base agreement covers flying by ExpressJet of a minimum of 205 regional jets in the first year and a minimum of 190 regional jets thereafter and gives Continental the right to withdraw another 15 aircraft in July 2009.
Effective July 1, the agreement also changes Continental’s governance rights gained when XJT was spun off by Continental several years ago which was part of its original CPA, including easing change-in-control limitations on ExpressJet, reducing restrictions on ExpressJet flying into Continental's hub airports, and removing the most-favored-nation clause, allowing ExpressJet to actively pursue flying for other carriers and to consider other strategic alternatives. The new agreement also removes Continental's ability to terminate the agreement without cause. Express Jet, which has long been negotiating a new rate with Continental, was holding out for a higher rate owing to the fact that Continental holds a golden share in its former wholly-owned subsidiary.
The new agreement, which also settled claims under the original CPA, is based on fixed block hour rates that include various pass-through expenses, such as aircraft rent, fuel, airport ground handling and landing fees. "We recognize the current challenging industry environment being faced by all airlines and we need to react quickly to this deteriorating situation,” stated President and Chief Executive Officer Jim Ream. “While this new agreement with Continental reduces uncertainty around the core aspect of our company, it certainly reflects the current operating environment and the evolution of the relationships between mainline and regional airlines. That said, we are pleased to have the opportunity to continue providing uninterrupted, seamless service to Continental and their customers."

Debt Restructuring
ExpressJet is calling a special meeting of stockholders to approve a potential issuance of additional shares of ExpressJet common stock and an amendment to ExpressJet's certificate of incorporation increasing the authorized number of shares of common stock in conjunction with the company's continuing effort to secure new terms from certain holders of its 4.25 percent Convertible Notes due 2023. It has already filed a preliminary proxy statement with the Securities and Exchange Commission.
The troubled carrier is also helping SkyWest and Continental perform the due diligence required of the proposed acquisition, despite the fact ExpressJet initially rejected the offer. However, it also said that conditions set forth in SkyWest’s proposal have yet to be satisfied. SkyWest proposed to acquire the ExpressJet for $3.50 per share in cash as part of a capacity purchase agreement with Continental which also required an amendment to the ExpressJet pilot contract. Related Story
ExpressJet said that its Special Committee, composed of independent outside members of ExpressJet's Board of Directors, along with the Special Committee's financial advisors from Goldman, Sachs & Co. and its legal advisors from Abrams & Laster LLP, have devoted considerable time and effort to assist SkyWest and Continental, as well as their financial and legal advisors, in performing their due diligence and to address the other conditions to the SkyWest merger proposal, said XJT.
"The ExpressJet Board and management continue to evaluate all appropriate and necessary actions to enhance value for ExpressJet stockholders in this difficult operating environment,” said George R. Bravante, Jr., Chairman of the Board of Directors. “The Board has authorized management to negotiate a new capacity purchase agreement with Continental, as well as to evaluate measures to reposition the current operating plan to address the challenging macroeconomic headwinds that all airlines are facing. We have confidence in management's ability to execute on these directives and in our employees' continuing commitment to provide exceptional service to our customers."

CO Ex Capacity to Drop, Airline Reduces Capacity, Fleet, Staffing
While Continental CEO Larry Kellner and President Jeff Smisek pledged to suspend their salaries for the rest of the year and declined any payment under the annual incentive program for 2008, the airline is eliminating about 3,000 positions, including management positions, through voluntary and involuntary separations, with the majority expected to be through voluntary programs.
“The airline industry is in a crisis,” said Kellner and Smisek. “Its business model doesn’t work with the current price of fuel and the existing level of capacity in the marketplace. We need to make changes in response. At current prices, Continental will pay $2.3 billion more for jet fuel than in 2007 – or about $50,000 per employee.”
Continental will reduce its flights, with fourth quarter domestic mainline departures to be down 16 percent year-over-year. This will result in a reduction of domestic mainline capacity by 11 percent in the fourth quarter, compared to the same period last year.
It is accelerating the retirement of its Boeing 737-300 and 737-500 fleets in favor of taking deliveries on 16 NextGen Beoing 737-800s and 737-900ERs this year and 18 next year. In the first six months of 2008, Continental removed six older aircraft from service. Continental will retire an additional 67 Boeing 737-300 and 737-500 aircraft, with 37 of these additional retirements occurring in 2008 and 30 in 2009. Given the need for prompt capacity reductions in today's environment, the airline said, 27 of the 67 aircraft will be removed in September. By the end of 2009, all 737-300 aircraft will be retired from Continental's fleet.
By the end of the second quarter of 2008, Continental will operate 375 mainline aircraft. Taking into account both the accelerated retirements and scheduled deliveries, Continental's fleet count will shrink to 356 aircraft in September 2008 and 344 aircraft at the end of 2009.

UA Fleet Cutbacks Increase
While it did not mention cutbacks among its regional jet operations which will inevitably come this fall, United is grounding 94 737s, after originally announcing plans to eliminate 30 737-500s in addition to the newly announced 64 737-300s. Also on the chopping block are 747. However, the cuts will not be completed until the end of next year. It will also announced more layoffs than the 500 recently cut along with the grounding of is all-coach Ted.