ExpressJet deal with Continental could prove an economic challenge

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US regional operator ExpressJet admits that achieving profitability in its recently-negotiated deal with long-term partner Continental Airlines could be a challenge without significant cost improvements.

ExpressJet in June reached a new agreement with Continental effective last month that includes lower block hour rates charged by ExpressJet to its major partner. In exchange restrictions on ExpressJet flying for other carriers are lifted, and the regional is allowed to return some aircraft back to Continental that were cut from their previous capacity agreement in 2007.

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 © Larry McManus/AirTeamImages.com

During an earnings call earlier today ExpressJet CEO Jim Ream said the carrier “gave significant economic concessions to Continental Airlines in order to secure a long term transaction”. 

Continental made it “pretty clear that the agreement was not workable the way it was today and they were going to terminate if we were not able to reach some positive outcome”, Ream explained.

Ream states that the economic benchmark set by Continental in the negotiations was possibly a marginal bid from another operator that already had business in place.

The chief executive believes it “is really going to be a stretch” for ExpressJet to be successful under the new agreement, and stresses the need for unit costs improvement “in order for us to have some modest amount of income”.

ExpressJet has what Ream deems as a “reasonable shot” at hitting that cost improvement but as a result of the new deal predicts the carrier will earn less than most of its peers in the industry on a “per tail basis”.

Fuel prices in particular are placing greater pressure on smaller aircraft, says Ream. The majority of aircraft ExpressJet flies on behalf of Continental are 50-seat Embraer ERJs.

“It obviously doesn’t make sense for them [Continental] to lose hundreds of millions and then for us to make tens of millions with an airplane that’s supporting that network,” Ream reasons.

To achieve the necessary unit costs improvements ExpressJet is holding discussions with its unions and suppliers. Ream says the carrier hopes to conclude those talks within the next 45-60 days.

“If we’re not successful in those conversations than I’m not sure we have a sustainable business,” warns Ream.

On top of less favorable economics from the Continental deal, ExpressJet faces a reduction in available seat miles (ASMs) during the fourth quarter. “It is somewhere in the neighborhood of a 30% drop off in capacity,” notes Ream.

The CEO cautions that, “Above and beyond getting a unit cost improvement we also need to get a dollar for dollar in expense savings for all those ASMs.”

That situation presents a challenge “given how quickly those ASMs are disappearing from us”, Ream notes.

Earlier today ExpressJet explained it needed $36 million in wage and benefit concessions, and on 15 July the carrier initiated a cut in those areas for management and clerical staff totaling $10.8 million.

ExpressJet is ending its branded flying operations on 2 September, and plans to fly 30 aircraft its charter operations on lower lease rates from Continental.

Source: Air Transport Intelligence news