CO announces details of capacity reductions

CO today released details of the reductions in flying that were announced last week. These actions are among the many difficult steps CO is taking to respond to record-high fuel prices that are creating unprecedented challenges for the airline industry.

Starting in September, at the conclusion of the peak summer season, CO will reduce capacity from its hubs, resulting in an 11 percent decline of domestic mainline capacity (available seat miles, or ASMs) in the fourth quarter, compared to the same period last year. The changes will result in a 6.4 percent decline in consolidated (mainline plus regional) capacity in the fourth quarter, compared to the same period last year.

As of Sept. 3, 2008, CO will be reducing frequencies in certain markets and will also discontinue service between its hubs shown below and the following cities or airports:

IAH: Cali, Colombia (CLO), Chattanooga, Tenn. (CHA), Guayaquil, Ecuador (GYE), Hartford, Conn. (BDL), Monclova, Mexico (LOV), Montgomery, Ala. (MGM), Oakland, Calif. (OAK), Palm Springs, Calif. (PSP), Reno, Nevada (RNO), Sarasota, Fla. (SRQ), Tallahassee, Fla. (TLH), and Washington – Dulles (IAD).

EWR: Albuquerque, N.M. (ABQ), Cologne, Germany (CGN), Santiago, Dominican Republic (STI), SRQ, Salt Lake City, Utah (SLC), San Jose, Calif. (SJC), and Tucson, Ariz. (TUS).

CLE: Austin, Texas (AUS), Birmingham, Ala. (BHM), Charleston, S.C. (CHS), Charleston, W. Va. (CRW), Cincinnati, Ohio (CVG), Des Moines, Iowa (DSM), Detroit, Mich. (DTW), Green Bay, Wis. (GRB), Greensboro, N.C.(GSO), Lexington, Ky. (LEX), Little Rock, Ark. (LIT), Memphis, Tenn. (MEM), Nashville, Tenn. (BNA), Norfolk, Va. (ORF); Oklahoma City, Okla. (OKC), Omaha, Neb. (OMA), Ottawa, Canada (YOW), San Antonio, Texas (SAT), San Diego, Calif. (SAN), SRQ, Savannah, Ga. (SAV), Toledo, Ohio (TOL), Tulsa, Okla. (TUL), IAD.

GUM: Denpasar, Bali, Indonesia (DPS).

As a result of the discontinued service, the following stations will be closed: DPS, OAK, CLO, PSP, CHA, RNO, CGN, STI, GRB, SRQ, GYE, TLH, LOV, TOL and MGM.

As announced last week, CO will eliminate 3,000 positions across all work groups, including management positions, through voluntary and involuntary separations, with the majority of them expected to be through voluntary programs. The specific number of involuntary furloughs will not be determined until August, after the company knows how many co-workers elect to take advantage of voluntary programs.

The company will work with furloughed/terminated co-workers to provide information on benefits and other employment opportunities available to them. In the case where suppliers and vendors are affected by capacity reductions, CO will work with them to determine if there are other job opportunities for their affected employees.

CO customers who are currently booked on flights previously scheduled to operate on or after Sept. 3 that are affected by the capacity reductions, will be contacted by CO to make alternate arrangements.

A pro-rate agreement basically means that the airline that operates the flights takes on the risk. So, ExpressJet flies a lot of routes out of LAX at their own risk but under the Delta brand. As part of the deal, they pay a percentage out to Delta to be a part of the network.

A capacity purchase agreement means that, using the same airlines, Delta would pay ExpressJet a flat amount for ExpressJet to fly certain routes for them. Delta would keep all the revenue, and ExpressJet would just get the fee. There are also pass-through costs, so Delta will pay a fixed amount, but the price of fuel, for example, would adjust to market.

It’s a risk/reward situation. The high risk of pro-rate flying means that when it works, the regional can make more money. The low risk of capacity purchase means a steady stream of revenue but not a big upside.

In a release today, ExpressJet disclosed that it has entered into a new capacity purchase agreement (“CPA”) with Continental Airlines. The agreement begins on July 1, 2008 and will cover the 205 aircraft currently operating as Continental Express for the first year. On July 1, 2009, Continental has the option to remove 15 aircraft meaning that the agreement would then cover 190 aircraft. The 15 removed aircraft could be returned to Continental.

Below is an overview of general information related to the new CPA and how it might affect ExpressJet employees.

For any specific questions not covered below, please use the HR Questionnaire online.

Q. How long is the new deal with Continental?

A. The new agreement becomes effective July 1, 2008 and continues for seven years. It initially provides for the flying of the 205 aircraft currently flown by ExpressJet Airlines as Continental Express, but maybe reduced to 190 after the first anniversary date.

The new agreement also removes Continental’s ability to terminate the agreement without cause.

Q. What happens to the 69 aircraft ExpressJet currently operates outside of the old CPA?

A. Our current aircraft allocation for the Fall includes: 205 planes flying as Continental Express; 23 planes flying for Delta Air Lines as Delta Connection; 23 planes flying under the ExpressJet brand name and 23 planes used by Corporate Aviation.

The new agreement permits ExpressJet to return up to 29 aircraft previously released from the original CPA to Continental before December 1, 2008, as well an additional 10 aircraft previously released from the original capacity purchase agreement upon certain conditions. The new agreement also allows ExpressJet to retain the remaining 30 aircraft previously released from the original capacity purchase agreement at reduced rental rates to use in its revenue-risk flying operations.

Q. Does this mean further reductions in the ExpressJet branded operation?

A. Currently our schedule is available for sale through October 2008. Given the current and forward-looking expectations for fuel prices, we expect to make further changes to our branded network.

Q. How does this impact our current charter operation?

A. We will continue to operate our charter operation as we do today. The Corporate Aviation group has made good progress; however, it is also facing the current industry crisis being caused by record-breaking fuel prices.

Q. Do we still have a contract with Delta?

A. Yes. We will continue to operate ten aircraft under our current CPA with Delta. That agreement is set to expire in June 2009.

The remaining 13 planes we fly for Delta are covered under a pro-rate agreement. Given current industry conditions, we are evaluating that flying as well.

Q. What happened to the offer from SkyWest to purchase ExpressJet?

A. Since the delivery of the SkyWest merger proposal, ExpressJet and the Special Committee, composed of independent outside members of ExpressJet’s Board of Directors, along with the Special Committee’s financial and legal advisors have devoted considerable time and effort to assist SkyWest and Continental, as well as their financial and legal advisors, in performing their due diligence and to address the other conditions to the SkyWest merger proposal. To date, the conditions set forth in SkyWest’s proposal have not been satisfied.

Q. What happens to the airports we manage for Continental?

A. We have also amended our ground handling agreement with Continental as part of the new CPA. Under the new agreement, we will continue to provide airport services similarly to the way we do today. However, Continental will continue to evaluate the economics related to ground handling in each of its airports through the bidding process. ExpressJet intends to submit bids to all requests for proposals.

Q. Does this change the way we earn income under the existing CPA?

A. Yes. The fixed block hour rates are considerably lower under the new agreement. The new agreement’s fixed block hour rates include various pass-through expenses, such as aircraft rent, fuel, airport ground handling and landing fees. The fixed block hour rates will be subject to annual adjustment tied to a consumer pricing index.

Q. Can we pursue other airline contracts?

A. Yes. The new agreement reduces restrictions on ExpressJet flying into Continental’s hub airports and removes the most-favored-nation clause, allowing ExpressJet to actively pursue flying more than ten aircraft under contract for other carriers.

Q. Will this change our travel privileges?

A. We are currently finalizing the travel agreement and will publish an updated Q&A document once it’s complete.

Q. How do record-breaking fuel prices fit into the new deal?

A. With unprecedented fuel prices, the industry is facing a crippling challenge. The new agreement allows Continental the economic savings they needed to continue using ExpressJet to provide reliable service to their customers and provides ExpressJet long-term predictability with its largest customer and additional flexibility to pursue other opportunities beyond our Continental Express flying.

Q. Is this the beginning of more changes for ExpressJet?

A. Yes. Based on the pressures that fuel is causing on the entire industry, ExpressJet will need to begin aggressively cutting its costs within all aspects of the organization.

CO announced today that it has reached a new seven-year capacity purchase agreement with ExpressJet Airlines (XJT) to provide regional jet service for CO at rates that are lower than rates under its current agreement and more competitive with those offered by other regional service providers. The new agreement is effective July 1, 2008.

The new contract enables CO to continue to benefit from the excellent service and substantial feed traffic provided by XJT.

The base agreement covers flying by XJT of a minimum of 205 regional jets in the first year and a minimum of 190 regional jets thereafter.

In addition, XJT has the right to return to CO 39 Embraer 50-seat regional jets that XJT currently uses for non-CO contract flying. CO plans to add the returned aircraft to the new agreement and withdraw from the agreement up to 30 of its Embraer 37-seat regional jets currently flown by XJT for CO.

CO will then sublease or ground all of the withdrawn Embraer 37-seat regional jets to better align regional capacity with current market conditions. Additionally, the agreement reduces the rent CO charges XJT on 30 other regional jets that XJT will retain for seven years to fly at its own revenue risk.

CO and XJT also entered into a settlement agreement and release of all the parties’ claims relating to payments and rates under the original capacity purchase agreement, including all disputes previously disclosed as possible matters for arbitration.

it seems all my bitching and complaining was for nothing. maybe that’s why i don’t run an airline. still, this should have happened two years ago. thanks, ream , for shaving ten years off my lifespan due to stress. my wife and children thank you.