Move Signals Shift in United's Regional Business

The newest United Express player is Trans States Airlines (TSA), which has signed a memorandum of understanding with United Airlines (UAL) [OTC BB: UALAQ.OB] to operate up to 25 50-seat regional jets as a United Express code-share partner at Washington Dulles and Chicago O'Hare over 10 years. The move is a strong signal that UAL is seeking to reduce its business relationship with long-time code-share partner Atlantic Coast Airlines (ACA) [Nasdaq: ACAI], which now provides all of United Express' service out of Dulles (CRAN, June 14).

UAL is committed to flying 267 regional jets (RJs) under agreements it has signed with four regional airlines to operate as United Express carriers. This is close to the 275 RJs UAL envisioned in its January 2003 business plan, and the news indicates that the anticipated growth in the RJ business is on track. UAL's total RJ fleet could rise to 399 if all options are exercised. This would surpass the 347 RJs currently in the Delta Connection fleet.

TSA, a privately-held regional carrier based in St. Louis, Mo., operates Embraer ERJ-145s, Jetstream 41s and ATR 72s, and already operates in the Midwest as AmericanConnection and in the Northeast as US Airways Express.

TSA will put together an all Embraer 145 fleet for UAL, Bill Mishk, TSA's vice president of marketing and planning, told CRAN.

Ten aircraft will be put into service beginning in September, with the remaining to follow in 2004 and 2005. "We're finishing up the mix of how many new and how many used [aircraft] right now."

TSA will use "multiple funding sources" to finance the used equipment, and is "in discussions with the manufacturer" over financing the new aircraft, Mishk said. He would not elaborate on the financing details. All United Express service out of Washington Dulles now is provided by ACA, but United and ACA have been haggling over terms of a new contract since the beginning of the year.

All signs point to TSA taking over some of ACA's Dulles routes, but Mishk would not discuss the impact of UAL's decision. "We're just concentrated on our business model," he said. "We're not focused on what others in the marketplace may or may not be doing."

ACA accounts for more than 50 percent of UAL's RJ fleet today. Even if ACA fails to gain any more business with UAL, it will still represent 31 percent of UAL's RJ fleet in 2005. Most analysts believe ACA will play a critical role in UAL's restructuring and expect the two sides to agree to a new United Express contract. ACA has told CRAN that it wants to sign a new contract.

The deal with Trans States appears to be a signal from UAL that it is willing to expand the number of code-share partners working out of Washington Dulles.

Trans States' operations in Washington and Chicago provide United with "further flexibility in its program," according to Greg Kaldahl, director of United Express. "This is a great deal for United and Trans States Airlines," he said. "This new agreement takes two airlines with proven operational excellence and creates a business relationship that will benefit United's customers."

Mishk said Trans States is "excited we have this expansion opportunity to help grow our business plan. This will not take away from our existing growth plans with our other partners, American Airlines and US Airways." Trans States Airlines operates 230 daily departures, and carries more than 2.5 million passengers per year. Trans States has more than 1,200 employees and serves 39 cities nationwide.

All of UAL's United Express agreements are tentative at this point and must be approved by the U.S. Bankruptcy Court.

>>Contact: Bill Mishk, Trans States Airlines, 314-222-4300; Web: http://www.transstates.net/<<