The start-up costs for both its branded service as well as its new Delta Connection operation, has reduced the profitability for ExpressJet (XJT), will continue to dampen results and may result in a loss for 2007, according to the company’s 10Q. With just 60 days of branded service experience, which includes Delta pro-rate operation as well as its new point-to-point service, ExpressJet’s consolidated report shows a second quarter loss of $26.4 million and a first half loss of $16.2 million.
The company is also working on at least two new projects, said President and CEO Jim Ream, who would not elaborate except to say one would be new business and the other would build on current business.
ExpressJet began its branded operation, consisting of 42 aircraft, serving 57 city pairs, on April 2 and completed the roll-out on June 12. Traffic continued to build during the quarter. Its branded service, with 220 daily departures, experienced a 50 percent load factor in June which built to 65 percent in July and is booking in August at the July rate. Including the ExpressJet network and Delta pro-rate operations, ExpressJet flew 193.7 million revenue passenger miles on capacity of 297.1 million available seat miles for a load factor of 65 percent.
The branded service shows a net loss of $31.1 million. Operating revenue from branded flying and aviation services contributed less than five percent to consolidated operating revenue. The transitioning of its 69 aircraft released from the Continental during the first six months of 2007, cost over $12 million for painting, maintenance modifications and training.
“It’s a demand and marketing issue,” said Ream of the branded service. “This quarter has been one of the company’s biggest challenges. We are not at our full selling capability with the distribution outlets. We need to punch into the next level of customers and give them the service they get with other airlines. The feedback we are getting from passengers is great. They’re excited and they are becoming our best sales people in these markets. The way we sell tickets and provide capacity purchase agreements will be the model for the future.”
He explained that XJT is not able to take full advantage of either the travel agent or corporate markets because that higher yielding traffic requires more complex itineraries which XJT cannot now book. The full capability will be reached some time in the third quarter and, once done, he expects more traffic at a higher yield.
“Even though we reported a loss this quarter, we successfully executed our market launches. While the challenges in building a network as quickly as we did are enormous, we are pleased with the progress of that effort and fully expect our branded service to be successful. While 80 percent is successful, the remaining 20 percent has to be analyzed with respect to changing the schedule or frequency to boost boarding for a total of 10-12 market pairs. There are not very many market pairs that won’t be successful. Perhaps one or two [of 57]. We are trying not to react until we get everything in place and then see where the traffic is for these markets. The schedule may look different by November. We now have slots out of Long Beach and we may be able to find better opportunities for the aircraft that are underperforming.”
He indicated that the base fares are in the low triple digits, too low for an independent carrier. However, the increase in passengers in July included passengers paying fares consistent with the levels needed. In fact, he said, the branded service needs a 25 to 30 percent increase in fares. The branded service is also getting connecting traffic, said Ream, who indicated tweaking the schedule will yield more connection opportunities.
An analyst noted the average fare was about $108.70 with a yield of 14.1 cents, but Ream would not yet talk about the CASM numbers. He would only say that tickets sold over the web had a CASM below 14 cents and a PRASM of 5.5 percent. “That will move higher if we are going to successful,’ said Ream. “If you increase load factor, fares and mix of traffic the cost will go up.
It flew 756 charter segments for the quarter using nine aircraft, including short-term flying solutions for other carriers, such as the Embraer ERJ-145 flying it did for JetBlue (JBLU) during March and April 2007.
During the second quarter of 2007, fuel expense increased $16.2 million or 28.1 percent, from the same period in 2006 mainly to support branded flying, corporate aviation and regional service for Delta through the transition of 30 aircraft from the Continental (CAL) CPA during the quarter. Fuel expenses under the Continental CPA and the Delta CPA were capped at $0.71 and $0.50, respectively, during the three months ended June 30, 2007.


The controllable completion factor for the quarter was 99.8 percent, excluding weather and air traffic problems. Its Continental operation is designed to provide a 10 percent operating margin as well as incentive payments for controllable completions higher than its historical benchmark and is required to pay Continental a penalty for controllable completion factors below 99.5 percent. It also receives a small per-passenger fee and incentive payments for certain on-time departures and baggage handling performance.
Second quarter net revenue totaled $395.2 million, down 5.8 percent, consisting of: $360.1 million from its Continental and Delta operations as well as charter flying; $28.2 million from the ExpressJet branded service, and $9.3 million from the provision of third-party ground handling and maintenance services. Passenger revenue declined 7.3 percent to $387.4 million, while expenses jumped 14.1 percent to $437.8 million. For the first half, operating revenue was down 2.2 percent to $807.2 million while operating expenses rose 11.1 percent to $835.6 million. During the quarter, ExpressJet continued to transition aircraft from Continental: 14 aircraft were painted, modified and placed on its branded network; 10 placed under the Delta capacity purchase agreement; and six, marketed for ad-hoc charter opportunities pending the start of Delta pro-rate flying on July 1. As of June 30, 66 of the 69 formerly Continental aircraft had been transitioned. The final three planes are expected to transition in August and will be placed in branded service. After the final transition from Continental, the expected aircraft allocation will be 224 aircraft dedicated to contract flying and 50 aircraft to branded flying, including the eight allocated to the Delta pro-rate agreement.
Available seat miles under the contract flying ExpressJet performed for Delta and Continental totaled 2.8 billion and represented 196,799 block hours across both systems. During the first month of operations under the Delta capacity purchase agreement which began in June, ExpressJet operated at a perfect 100 percent completion factor.
Subsequent to quarter end, ExpressJet and Continental received the final decision for their arbitration regarding 2007 block hour revenue rates under the companies' capacity purchase agreement. Ream explained the arbitration was more about confirming provisions of the contracts that could be interpreted more than one way. The revenue booked year-to-date was based on old rates. When Continental and XJT starting renegotiating, CAL originally requested $120 million in cost reduction. The panel determined that the 2007 budgeted rates originally presented by ExpressJet should be reduced by a total of approximately $14.2 million (which includes the margin of 10 percent the company earns on its expenses under the agreement). This revenue reduction resulted in a $6.5 million decrease in operating income recorded in the second quarter. This adjustment reflects the variance between the 2006 rates used to book revenue prior to the arbitration decision plus arbitration fees and expenses. ExpressJet’s second quarter 2007 operating income reflected a 10.8 percent operating margin, compared with an operating margin of 8.5 percent in the year-ago period.
ExpressJet ended the second quarter of 2007 with $294 million in cash and cash equivalents, including $14.5 million in restricted cash, down $8.9 million from the $302.9 million reported at year-end. Capital expenditures totaled $20.6 million for the second quarter 2007 compared to $3.5 million during the same period in 2006. ExpressJet anticipates capital expenditures totaling approximately $12 million for the remainder of 2007.