ExpressJet Executive Director-Asia Ian Vanderbeek told an Australian newspaper that the airline will either make a code-sharing deal with an existing Australian carrier or start up its own point-to-point operation. The target date for launching operations would be the end of 2008, he said. The company has held discussion with a number of carriers, Vanderbeek reported, adding if no agreement is reached, XJT might build a fleet of 20 aircraft for flights on longer, thinner routes “which will complement existing carriers’ route networks, which are currently under developed,” he said, adding the airline hoped to make an announcement in the next six months. "There's a role for this model with all existing carriers. It’s a question of how they perceive this sort of operation working.”
The carrier would not comment on the specifics of the story except to say: “We continue to evaluate opportunities abroad for ExpressJet. However, any analysis is still in the very preliminary stages.”

Calyon: XJT Caught in Tug of War
Before the news emerged about a potential Australian operation, Calyon Securities Analyst Ray Niedl described ExpressJet’s weakened stock position as a tug of war between its long-term contract flying for Continental and the branded service it launched earlier this year. “In arriving at our revised quarterly estimate we believe that XJT will produce an operating profit of about $28 million on their contract flying which is relatively stable and predictable,” he told investors in his latest bulletin on the company. “Their newer branded business has no track record, is a start-up and, we believe, will produce large losses of $46 million based on key assumptions. Net interest income for the quarter should amount to about $1.9 million and income tax credits will be available on company losses. We suspect that it will challenging at this early date to convince investors to pay for the future prospects in this operation in the near term.”
He revised the price of $3 per share, saying it reflected the company’s current cash balance offset by operating losses and operational uncertainty. Niedl indicated the company has limited prospects for profits for the next 18 months.
“When XJT reports its results we expect them to show a loss of $0.19/share versus a profit of $0.38/share in the year ago quarter,” he reported in his recent bulletin. “The critical issue in our view is their ability to succeed with their new branded product, the outlook for which currently looks very doubtful in our view, and this uncertainty is weighing on the share price. That said, we believe that XJT's strong cash reserves ($280 million on the balance sheet as of June) and cash flow from its Continental contract flying should keep it afloat for the foreseeable future hence supporting the current stock price. With the limited information at this time, making estimating earnings difficult, we believe that the key issue for investors to take note of is the order of magnitude and direction.
Niedl predicted the U.S. airline industry would earn $1.7 billion for 3Q07, although that solid performance is less than expected owing to higher fuel and non-fuel costs. For 2007, he indicated airlines would more than double its profits to $4.5 billion. “The regional airlines continue to look uncertain because of limited potential growth and continuing pressure on costs,” he said.
He cited stockholder frustration with stock prices to the point they are suggesting spinning off assets such as regional feed partners, one of which – Comair – was the subject of questioning during this week’s Delta third quarter broadcast. They also pointed to frequent flyer programs and maintenance operations, believing, said Niedl, that the parts are worth more than what the market is currently valuing the entire airlines.
“The natives are getting restless as the industry returns to profitability,” he said in a recent report. “The powerful labor unions, led by the pilots, are lobbying for big salary increases, even in some cases where their contracts do not become amendable for a number of years. We believe that 2009 will be a challenging year for airline management to control costs as a result.”
Niedl said his company remains neutral on the industry but expects slowing economic growth even if fuel remains at its current levels and there is no recession. “We believe that the only developments that could bring a major fall in the airline stock price rally would be a significant decline in oil prices, a series of general across-the-board ticket price increases, or expectations of industry consolidation once again picking up. None is expected for the remainder of the year,” he said. “The network carriers remain our favorite sector and at current prices, we believe they look cheap and will benefit if 2008 demand remains strong. Government-imposed restrictions on flight operations could be a blessing in disguise since a discipline in capacity would be imposed, giving carriers a chance to raise ticket prices. The low-cost carriers still remain in the position of putting in too much capacity, giving them the challenge of filling a large amount of new seats. In our view, the Latin carriers that we follow appear to still have the best potential over the next six to nine months.”