ExpressJet profitability hinges on improvement in United rates

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Utah-based regional carrier SkyWest has identified some of the legacy Continental Airlines contract rates with ExpressJet Airlines as "subpar", as it works to improve profitability at the subsidiary.

"We have some contract rate issues," says Brad Rich, chairman and chief executive of SkyWest, during an earnings call on 7 August, referring to the "legacy [Continental] express" operation at ExpressJet. "We've got to figure out a way to get some improvement in the rates."

He outlines three ways to improve the rates: one, extend the contracts on groups of the up to 50-seat aircraft at market rates as they "naturally terminate"; two, replace the aircraft with different types at market rates; or three, eliminate that flying.

"In the first few groups of aircraft that have come up for natural termination, we have had some success at extending aircraft at improved rates," says Rich.

ExpressJet flies at least 243 Bombardier CRJ200, Embraer 135 and Embraer 145 aircraft under contracts with United Airlines, according to a stock exchange filing on 7 August.

Continental merged with United in 2010.

ExpressJet posted a $4.2 million operating loss - nearly double that in the second quarter of 2012 - during the second quarter. Operating revenue fell 11.7% to $375.6 million and operating expenses decreased 11.2% to $379.8 million.

Rich says that the focus at ExpressJet is to reduce costs, especially labour rates, until it can improve the contract rates.

ExpressJet's loss compares to a 36.2% year-on-year improvement to $39.9 million operating profit on operating revenue of $463.1 million and operating expenses of $423.1 million for SkyWest's SkyWest Airlines segment during the period.

SkyWest reports a $33.7 million operating profit and a $20.7 million net profit for the quarter.

One option for SkyWest is to replace ExpressJet 37- and 50-seaters with 76-seat Embraer 175s at United. It signed a 12-year capacity purchase agreement for 40 of the large regional jets with the Chicago-based mainline carrier in May. The aircraft will begin entering service from the second quarter of 2014.

"Some of these could be temporarily incremental aircraft, but we don't know the exact answer to how this plays into [United's] overall regional fleet management," says Rich when asked whether the E-175s would replace smaller ExpressJet jets.

He adds that United management has said publicly that they plan "either limited or will be very careful at incremental growth in the total regional system".

SkyWest anticipates placing 20 E-175s in service at United during 2014 and another 20 during 2015.