ExpressJet Holdings, Inc. rushed its third quarter results to investors last week and expected to file its 10Q at press time last Friday in order to help the investment community begin modeling the future success of the company, according to CEO Jim Ream in remarks to investors. Once that is accomplished and the models are published, he said, ‘it is our job to beat them,” thereby restoring confidence in a company that has taken huge risks in the past year.
The company reported a third quarter loss of $22.3 million, or $0.41 per share. Third quarter net revenue totaled $441.3 million up three percent, consisting primarily of: $357.4 million from the company's contract flying with Continental and Delta airlines and of charter flying; $75.6 million from the branded operation, which includes flying as ExpressJet and pro-rate flying for Delta; and $9.9 million from the provision of third-party ground handling and maintenance services. Available seat miles under the contract flying ExpressJet performed for Delta and Continental totaled 2.8 billion and represented 192,151 block hours across both systems.
The company continues to work on distribution problems that have kept it from penetrating the business market more, especially for passengers with more complex itineraries as described in the last investor’s briefing. Related Story
“There are really two issues with our point-to-point operation,” said Ream, adding that community reaction is strong with the airline making significant headway. “The first is the company’s ability to sell and we are working to improve that and hope to have that completed in the fourth quarter. By December, we will largely have the system where we want it to be. The challenges we faced in communicating our brand have been resolved and we saw revenue rebound in October. There is also our partnering opportunities and discussions are going well. Later in the fourth quarter or in the first quarter of ’08 we’ll be able to talk about some opportunities that will present more value to our customers. The second big issue is how markets are doing individually and we are monitoring that, finding ways to fine tune them now that we have a sense of the underlying demand in the market pairs.” He did not mention reports the company was working on an Australian express or point-to-point operation. Related Story
The airline dropped Corpus Christi and Louisville in favor of new markets in the West, having already announced new service launches for Reno, Long Beach and Santa Barbara. Related Story  It also cut back on frequencies. “Where we had 42 aircraft in our point-to-point operation, averaging two flights per day for 57 market pairs,” said Ream, “we’ve flattened out our system and broadened our scope and have 36 lines of flight to 25 cities for 65 market pairs which is about 1.5 departures daily. This better matches our supply to demand and takes advantage of new opportunities.”
After analysts expressed concern about the perceived risk to its Continental contract, Ream explained that Continental enjoys immense flexibility with its ability to cancel the contract with a year’s notice. It also has a golden share of Express Jet which means it can control ownership. However, it wants a reduced rate for contract flying which was at the root of XJT’s loss of 25 percent of its Continental Express operation. XJT, said Ream, is currently in strong discussions with its major partner basically trying to monetize the control and flexibility Continental has that is unique to their relationship compared to other capacity purchase agreements. “The ball is back in our court to take as much of Continental’s interest into consideration,” he said. “It depends on what the tradeoffs will be in terms of economics and what we can get for our shareholders. We will likely come to something approaching the middle between the agreement we have today and the market rates that are out there. It may take awhile and we hope to see something in the first part of next year.”
When asked why its point-to-point model is any different than the ill-fated Fly I, he again noted the differences include Fly I’s hub operation and reliance on a single geographic region, versus XJTs more flexible network. “Where they had competitive issues, we have supply and demand issues which we are addressing. The supply and demand balance is more important to us than having an optimized schedule for every customer under the sun.”
In response to a question from Calyon Securities Analyst Ray Niedl who asked about privatizing the company in order to rework it and then doing an IPO, Ream indicated, while that has been discussed, the company is confident enough to play out the hand as a public company. “From the board and management perspective where the stock is trading is not where we believe the value of the company is,” he said. “It is hard to take the public reporting and retain public confidence and do what we think is right. But we are doing what makes sense for the shareholders and we prefer to run with what we have now.”
In August, ExpressJet transitioned the final three aircraft from its capacity purchase agreement with Continental, resulting in a September 30 allocation of 224 aircraft in contract flying and 50 aircraft split between the Delta pro-rate agreement (eight aircraft) and ExpressJet branded flying (42 aircraft). It also increased its Delta pro-rate flying at Los Angeles by three aircraft for a total of 11. After Delta expressed interest in increased Salt Lake capacity, XJT advised taking three aircraft from the Delta Capacity Purchase operation at LAX and moving them to Salt Lake, which it ultimately did. Its Continental transitions included redeploying expenses out of the Continental operation and into its branded flying, something the airline is currently working through. Some of the transition expenses are reimbursable by Continental and some not, said Ream.
In the branded segment, the company ended the quarter with 534 million revenue passenger miles and a load factor of 61 percent. Statistics for October are trending similarly to results reported in July and August. ExpressJet cited distribution channels as remaining problematic but said it expects to resolve those issues by year’s end. It is trying to increase yield with recent reservation system enhancements providing travel agents additional booking functionality through their chosen global distribution system.
Two to four aircraft removed from the ExpressJet Airlines system effective November 11 will be used in a short-term agreement with Frontier Airlines, Inc. ExpressJet Corporate Aviation will begin flying for Frontier November 15 from Denver to Billings, Wichita, Rapid City, Albuquerque, El Paso, and Oklahoma City to help cover routes planned for service via Lynx Aviation. The agreement is scheduled to end in January 2008.
ExpressJet's third quarter 2007 operating income reflected an 8.3 percent operating margin. The principal factors contributing to these results were continued development of new flying for the 69 aircraft no longer covered under the company's capacity purchase agreement with Continental. ExpressJet also saw an average fuel price increase of eight percent on increased volume of 89 percent, compared with branded operations in second quarter 2007 and higher other operating expenses, including travel and hotel costs, in the contract operation.
ExpressJet ended the third quarter of 2007 with $253.8 million in cash and cash equivalents, including $15.3 million in restricted cash. Although Holdings did not make any purchases under its previously announced securities repurchase program, it intends to use a portion of its current cash balance to begin repurchasing stock.
Capital expenditures totaled $11.5 million for the third quarter 2007 compared to $5.8 million during the same period in 2006. ExpressJet anticipates capital expenditures of approximately $2.0 million for the remainder of 2007.
For the nine months, the carrier posted a 0.3 percent decline in operating revenue to $1.2 million, and a $65,000 operating loss, along with a $38,500 net loss.