SkyWest and Continental Put the Screws to ExpressJet

Continental, ExpressJet, Mergers/Finance, SkyWest

An interesting little merger attempt popped up on Friday that, as Holly Hegeman says, looks like a squeeze play. SkyWest and Continental Put ExpressJet in a Bad SpotSkyWest has announced that it wants to buy ExpressJet for $3.50 a share.

The airline was hovering just over the $2 a share mark before the announcement, so this is a nice little premium. ExpressJet, however, thinks it’s worth more than that and has turned the offer down. It got more interesting on Friday afternoon when it came out that Continental is also behind this thing.

Continental hasn’t been happy with the relatively hight costs of the ExpressJet contract, and it has apparently told ExpressJet that it will remove 51 of the aircraft under contract beginning in December 2009. At the same time, it went and cut a deal with SkyWest on a broad new deal that will only go into effect if the takeover occurs. So, SkyWest buys ExpressJet and offers to fly for Continental for less. Continental tells ExpressJet that they either do it or they’re going to start walking. Wow, it sucks to be ExpressJet.

I have to think that if SkyWest wins, the ExpressJet standalone operation will probably be toast. That’s really too bad, since I’ve always thought it was a good idea. But with oil where it is right now, those 50 seat jets (and really, any plane in general) don’t look very good anywhere. And SkyWest probably will want to remain focused on the feeder operation, I’d think.

But why does SkyWest want a bunch more 50 seaters? No matter what the reason, I’m sure the ExpressJet guys are feeling very, very somber right now.

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26 comments on “SkyWest and Continental Put the Screws to ExpressJet

  1. Is this really Mr. Cranky writing? CRJs on a standalone basis are (or ever were) a “good idea”?

  2. Were the economics of flying the 50 seaters that tenious that the rise in fuel is making them not worth it? Or was it that + how much the main airlines used to be willing to subsidize them?

  3. I think it was that the labor for the RJ flying used to be cheap enough to more than balance out the higher fuel cost per pax.

    That is not true any longer.

  4. Cranky, maybe a brief history lesson is in order

    In the late 80’s Continental, like most mainline operations, decides they needed to take control of their regional and short haul flying. Flush with cash, they buy out several of their code share partners and aggressively expand their regional operations under the name Continental Express.

    Around 2000-2001, yields have peaked and load factors are slipping. The R word is in the air. They decide to off load the investment in regional flying and start pitching the idea on Wall Street and to the major banks.

    After 9/11 the airline business is in the tank. Investors are nervous, so Continental provides generous long-term contracts to “sweeten the deal”. Of course there are out clauses and such, but that gets mostly swept under the rug in the IPO hype. The IPO launches at $16. Express Jet is born.

    Just a couple years into the deal, with fares flat and costs rising, Continental starts complaining. They threaten to bid out some Express flying, and tell Express Jet to either cut costs, return some planes or find some place else to fly them.

    Feeling some obligation to shareholders, and more than a bit slighted, Express jet starts a stand-alone operation with the excess aircraft. Some folks, including our dear friend Cranky, are cautiously optimistic.

    Business gets worse, both at Continental and Express. Costs are out of control.

    Continental partners with Sky West and offers to buy the operation back for $3.50

    It’s not for nothing that Continental is considered to be “well managed”.

    Of course shareholders, Express management and employees all have a right to feel a bit ‘cranky’ themselves. (other terms might be more appropriate, except this is a family blog)

    Meanwhile over at American, dissident shareholders are urging Management to unload Eagle. American is exploring “all options”.

    Stay tuned while history repeats….

  5. Expressjet it halfway to becoming Independence Air. How can they operate their own carrier with no code shares or even loyalty programs? At least they are keeping their CO express business. The ERJ-145 is a miserable plane though, especially compared with the 190.

  6. Sorry for not responding sooner, but I´m finally taking a break on my trip to sit down at a computer.

    SeaFlyer – Well, not exactly. I like the idea of serving as a Southwest Express type model connecting smaller point to point markets. ExpressJet was stuck with the 50 seaters after they told CO they wanted to keep them, so they had to do something with them. I give them credit for trying, but the 50 seat CRJ is not the best plane for this to work.

    Allen – People loved flying the 50 seaters and were willing to pay more for them over props and that´s why they exploded in popularity. Now the price of fuel has changed that dynamic a lot.

    David Nehme – I´d be careful comparing these two situations. Independence Air tried to go out on their own and compete directly against a major airline with high frequency. They never had a chance. At least ExpressJet is trying to serve markets that aren´t served nonstop by anyone else. Still, I agree that if they could link into a loyalty program and codeshare, it would be huge.

  7. uh oh. one of those mechanic guys has something to say. let’s all dumb it down a bit. million miler is right. we are a little cranky. i’ve been with coex, or expressjet, or whatever you want to call it for ten years now. we feel like we have all worked so hard to help put together a good product for big c, and when things get tough, they flip us like a hooker on nickel night. i personally hope this is continental’s way of getting rid of ream and letting us jump into that cozy bed we shared with big c again. like mentioned before, i admire xjet’s tenacity, but in today’s environment, stick to what works. we were born as a company to fly for a big airline. we don’t need to be out buying paint shops, trying to start our own airline, etc.
    just some thoughts from one of them grease monkeys.

  8. I agree mechanic x. I have been a Flight Attendant for 14 years for well now express jet. Your so right. Big C needs to by us back. I recall the day I went into work for Co Air Express. Came back with a I.D saying express jet. I was pissed!!! Why would they even IPO us under our nose! Since this has happen. Many people have quite and went to Co Air in different Depts. Co please take your baby back!!!!

  9. actually, slave, they are buying us back. u know when the pilots union and skywest started meeting, that they are starting to get serious. it’s just a matter of time now. once the numbers get right, the deal is done. the expressjet branded is finished no matter what happens. i’m sure continental or skywest, or both, will find somewhere for those other 69 airplanes. the question is what’s gonna happen to the workers. i personally have alot of friends who went over to the branded, so i’m worried for them. i believe continental actually WANTS us back. why else would they tell skywest that they get a cpa but only if they acquires us. but whatever. i just wish it were over already. i’m tired of worrying, thinking, talking, wondering, etc. about it all.

    mechanic x

  10. sittin here at iah doin a 5a check on nightshift,(actually, on break right now). cranky, i was wondering if you had heard any more on the skywest, xjt deal. there’s a nasty rumor floating around that xjt wants 600 million or no deal. that seems absulutely nuts, and i don’t really know if this rumor has any legs. just curious if you had heard anything more.

    mechanic x

  11. thanx. i’m new to the site, but i like reading on it. lots of good stuff. keep up the good work.

  12. where to start. since i don’t have my own site or any other place to vent, i sincerely hope cranky doesn’t mind if i vent here.
    on friday, expressjet’s pilot’s union said thanks, but no thanks to skywest. are u kidding me? i don’t understand everything about their scope clause in their contract, but this just doesn’t make sense. they see some of the items in skywest’s proposal as bait, thinking they’ll jump onboard with the acquisition, and get screwed later. i guess that’s a possibility. but what they’ve done now is essentially guarantee the demise of this company. so let’s see, maybe get screwed later, maybe not, or guarantee the entire company’s unemployment. well that’s an easy choice for me.
    i’m sure there’s a little more to it than what alpa is letting out, but whatever. i’ve read things like “the situation isn’t as dire as skywest proposes”. i wonder what rose colored glasses they’re looking through. in regards to continental not extending our current cpa, i’ve read words like “this presents an opportunity for expressjet”. really? seriously, what opportunity? everybody and their brother is cutting back and flat out leaving the west coast which is where they chose to start our little airline. unless we’re the last ones standing out there and pick up all that business (which isn’t going to happen, btw), what are we going to do with those planes, and the other 51 that big c are gonna start removing next year? we’ve already shown that we can’t survive as a money making airline on our own. the size of the planes won’t allow it.
    alpa said it did what was best in the interest of it’s pilots and all xjt employees. funny, i don’t remember anyone asking me what i thought or wanted. they actually want me to believe that the pilots union cares about everyone else in the company. if they cared , they wouldn’t be gambling with my livlihood. it’s hard not to take it personally when my career, my paycheck, my family’s well being is being decided by somebody else. it’s offensive, scary, and it pisses me off. i hope skywest waits around a while till we file bankruptcy and throw out any existing union contracts, and then moves in and has their way with them. nothing would make me happier.

  13. The thing that concerns me the most as an expressjet employee and a union guy is that when (if) skywest buys us, how many of us down the line will lose our jobs. If skywest undercut xjt’s cpa price that significantly, the only way they will get it done is either cut back on the quality of work, cut back on wages and benefits, or cut people all together. None of those options is good long term or short for employment.

  14. Sadly, Thundernine, your fate may not be much better as a standalone airline. Management has already cut 30%+ of branded flying, so I have to assume that will result in layoffs. And now you guys are in negotiations with Continental about a new agreement of your own which could result in a similar end. It’s not a good time to be an airline employee anywhere right now. It’s very sad, and I wish everyone luck.

  15. back to work on my monday (wed night). supposedly there’s a big announcement coming down the pipe tomorrow. the rumor mill around iah says that it has something to do with our cpa negotiations with cal. nobody seems to know if the announcememt is coming from xjt or cal. either way, i hope this begins us moving forward. what’s happening at united is sad to watch, but i know is also necessary. if only our people would man-up and get on with it. enough is enough. fustrating that we’re back to square one where we started a couple years ago. if mgt. would’ve taken that stance back then, we wouldn’t have gone through the chatauqua abortion, and the skywest drama. just agree to lower costs, lay off, paycuts, whatever is needed and move on. in closing, i have a sneaky suspicion that we haven’t heard the last from skywest as far as some kind of buyout/merger, or whatever u want to call it. wheels up, let’s get on with it already.

  16. CO, ExpressJet reach new seven-year capacity purchase agreement

    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.

  17. i’m not sure if i’m supposed to copy and paste stuff to employees, but for all the stress they put is through, i don’t care. here’s some more info:

    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.

  18. CF – This might work into the XJ post, or a later one, but defining out Capacity Purchase agreement, Pro-rata agreement, etc would be great.. Perhaps in a roundup on the “express” operations?

  19. Nicholas – This probably would be post-worthy, but I’ll put the basic definition here:

    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.

  20. cf probably has better info on all this , but here’s a daily update put out to employees on some of the big c cutback details. i know cf likes to chew on these routes and talk about them so , bon’ appetit’!

    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.

  21. Ok, sorry, I lied. I just put up my post on the new US/UA fees but comments on the Continental stuff will have to wait.

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