SkyWest presents United with ultimatum on ExpressJet rates

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SkyWest Inc presented United Airlines with an ultimatum on the future of its regional feed from ExpressJet Airlines today – renegotiate the existing contracts or the operation will shrink.

Brad Rich, president of the Utah-based regional carrier that owns ExpressJet, outlined the situation as part of a three-part plan that SkyWest has to return its money-losing ExpressJet operations to profitability.

“We know where we’re making money and generating positive cash flow and we know where we’re not,” he says during an earnings call. “We’re ready to remove operations that lose money and generate negative cash flow.”

ExpressJet lost about $50 million in 2013, executives say.

SkyWest would remove ExpressJet aircraft from operations at United “naturally” as their contracts expire, says Rich.

Contracts for 25 Embraer ERJ-145s at United expire in 2014, says SkyWest Inc chief financial officer Mike Kraupp.

The Chicago-based mainline carrier detailed plans to remove 25 ERJ-145s from its regional fleet in 2014, in a January investor update. However, Republic Airways announced earlier in February that it would remove 12 ERJ-145s that its Chautauqua Airlines subsidiary flies for United during the year as well.

If all of the ExpressJet and Republic reductions are realised, United’s ERJ-145 fleet will shrink by up 37 aircraft versus the planned 25 in 2014.

United also plans to remove all nine Embraer ERJ-135 aircraft in its regional fleet in 2014. These are operated by ExpressJet.

SkyWest was not immediately available to comment on whether the 25 naturally expiring aircraft include the ERJ-135s.

Cost reductions, improved operational reliability and modifications to the existing agreements form the three-part plan for ExpressJet that Rich outlines. Cost saving initiatives include productivity improvements, joint labour agreements and new contracts with vendors.

Operational improvements will both reduce costs, especially during irregular operations, and improve revenues from partner carriers, he says. The plan includes increasing the number of spares, organisational changes and optimising the network to ensure that crews and maintenance flow effectively.

Modifying its contracts with United or shrinking the ExpressJet fleet is the third aspect of the plan, says Rich.

“Size means nothing to us if it can’t create value,” he says. “If we can’t create value from size, then we need to downsize.”

The sudden focus on ExpressJet’s financial performance comes after three years of restructuring efforts by SkyWest. While this effort has included many aspects of the airline’s business, the “non-contributing 50-seat flying” of 300 aircraft operating under contract for United are the most significant issue, said SkyWest Inc chief executive Jerry Atkins in November 2013.

“That’s just a nice way to say we have quite a few airplanes that are losing money at ExpressJet,” he said.

In response to analyst questions on why the sudden emphasis after years of restructuring, Rich says that the continued losses have brought a “sense of urgency” to the issue.

“This simply cannot continue,” he says of the losses.