Higher than expected pilot training costs, expenses on its transition of 36 aircraft and 2006 payment rates from Continental (CAL) forced the halving of ExpressJet Holdings (XJT) first quarter net income. It dropped 57 percent to $10.2 million, or 18 cents a share, while revenue rose 1.5 percent to $412 million. The Houston-based airline said its operating margin dropped to 3.5 percent from 9.2 percent because of the increased expenses and because it remains in arbitration with Continental over rates and, pending the resolution, it is being paid at a 2006 rate structure.
“ExpressJet potentially faces the most risk of the five regional airlines that we follow as it employs a significant portion of its assets in pursuit of its independent flying,” said Niedl. “We do not believe that success or failure in this area will be discernible for at least a couple of quarters.”
As with all regionals, pilot attrition has been a problem. However, XJT has lost pilots at its senior levels, including check captains, which have moved on to larger carriers. Consequently, while it may have enough pilots, they await their check rides. The company expects this to continue in its second and third quarters.
Its major transition problems have occurred in distribution which CEO Jim Ream described as system interface issues and is a matter of getting with the distribution network to figure out how to incorporate XJT’s branded service. He indicated that while the airline is still working on Amadeus, problems, including getting on both the full service and low-fare distribution networks as well as quality control, with the rest have been resolved.
Ream indicated the airline still had a lot of marketing work to do in its branded service since the market was not used to such a service. In addition, he added that he is not focusing on other airlines’ competitive moves in its new markets, such as American’s (AMR) decision to launch American Eagle Raleigh-Louisville service on top of XJT’s new service in the market. Instead he is concentrating on the development of the network, which is scheduled to be completed next month, and marketing to boost passengers from what he described as thin loads to date.
“We don’t see changing our schedules because of competitive issues,” he told analysts, adding he would not talk about branded service results since it only launched April 2 and was still in the process of completing that phase. “We are in the concept proving mode. We prefer to give it couple of years, letting the market dictate which carrier they prefer. We need to give it some time and if a route is thinner than anticipated, then we would tweak the schedule. Things are so dynamic now it will be the back end of the third quarter before we have an idea of what is really going on. Once we have all our markets up for a full month, we’ll have the best shot of getting out a meaningful statistics that people can begin to model.”
July would be the first full month of operation for all 47 of the 55 different market pairs it is launching. “Our job is to connect with the community and not pay a lot of attention to what someone may be doing competitively,” he concluded.
ExpressJet is currently in the process of negotiating with Delta (DAL) a pro-rate contract for additional Los Angeles flying through which XJT would keep the on-board segment and Delta would take the beyond revenue. The talks cover an additional eight aircraft at LAX which would launch service on July 1. Express Jet already gained a contract as part of Delta’s LAX expansion. Related Story  The agreement covers 10 ERJ-145XR aircraft that will be placed into service in June. Delta will be responsible for scheduling, marketing, pricing and revenue management on the aircraft and will collect all passenger revenues. ExpressJet will operate, maintain and finance the aircraft. For the new flying, ExpressJet will be responsible for local market pricing and revenue management, the operation and maintenance of the aircraft and will share responsibility for the schedule and marketing with Delta. ExpressJet expects to earn a pro-rated portion of the fare plus an incentive for passengers connecting onto Delta's network.
Its corporate aircaft work is progressing but it now only has nine aircraft doing that work compared to the 15 it had projected. However, Ream said that getting into the pro-rate market was something the company wanted to do anyway and thus is using the additional aircraft for its Delta pro-rate service.   “Where we will ultimately take the charter business we don’t know,” he said. “We think there is a real market there and hopefully it will become another avenue with which we grow so we will have charter, pro-rate, expanded fee-for-service contracts and branded flying.”
First quarter operating revenue increased 1.5 percent to $412.1 million, versus $405.8 million in the first quarter of 2006. During the quarter, ExpressJet transitioned 34 aircraft from its capacity purchase agreement with Continental. Nine of those aircraft launched branded service on April 2 with an additional seven aircraft in paint, modification or maintenance lines.
To date, ExpressJet has inaugurated service in 20 of the 24 cities it currently plans to serve. All routes are scheduled to be operating by June 12.
During the first quarter, ExpressJet and Continental submitted their disagreements relating to 2007 rates under their capacity purchase agreement to binding arbitration in accordance with the terms of the agreement. The arbitration is scheduled to be held June 25-29, 2007 and a final decision is expected approximately 20 days after the hearing ends.
ExpressJet ended the first quarter of 2007 with $318.4 million in cash and cash equivalents, including $11.5 million in restricted cash, an increase of $15.5 million over year-end. Capital expenditures totaled $11.7 million for the first quarter 2007 compared to $6.3 million during the same period in 2006. ExpressJet anticipates capital expenditures totaling approximately $33 million for the remainder of 2007.