The news started rolling in on Tuesday. United would be purchasing regional-operator ExpressJet from its current parent company SkyWest, but this is no ordinary purchase. It’s a very complex transaction that has United only acquiring a minority stake in a shell company that will be majority-owned by a separate, secretive company owned by “seasoned airline managers.” Confused? You aren’t alone, but there is actually good reason for this.
United is the only one of the big three in the US that doesn’t own any of its regional partners. American has long owned Envoy, Piedmont, and PSA. Meanwhile, Delta — which had sold its previous regionals in a fire sale to raise cash back in the day — now owns Endeavor.
United started to get into this game in 2016 when it bought 40 percent of Commutair. The rest of that airline is owned by Champlain Enterprises, LLC. Now United is doing something similar but even more complex for this ExpressJet acquisition. (There’s a chance that Commutair and ExpressJet will be related, as I’ll explain.) You’re probably wondering why that is.
United has a fairly unique clause in its flight attendant contract that throws a wrench in the airline’s plans to have a wholly-owned subsidiary. Specifically, this clause is mentioned in a side letter which you can find on page 401 of this doc.
… to the extent permitted by law, the Company will recognize the Union as the exclusive bargaining representative for the Flight Attendants on any commuter airline (primary 135 carrier) which it establishes or purchases in whole or in significant part. Upon recognition, the Union and the Company agree to negotiate in a timely fashion a competitive agreement no less favorable than area standard contracts for similar flying operations.
So, if United purchases a regional “in whole or in significant part,” then the United flight attendants have to fly those airplanes, albeit under different contract conditions.
United might not say it as bluntly, but it seems pretty clear that it would rather keep any regional operations as separate as possible from mainline so it can keep costs down. So, what could it do?
Well, it could go out and buy an insignificant stake in a regional, but then it wouldn’t have control. So it has instead concocted this master plan.
ManaAir, LLC will purchase ExpressJet from SkyWest. Who the heck is ManaAir? Well it’s just a new shell company and we don’t know much more…yet But an 8-K filed by SkyWest indicates that Subodh Karnik is President and CEO. Who’s that? Well he’s been running Commutair, so either he’s making a move or there will be a relationship between the two to be revealed later here.
United will take a “minority” stake in ManaAir, though I don’t see details of what that means, yet. And the rest will be owned by the also-mysterious KAir Enterprises, Inc.
Who is KAir? Again, we have no clue yet, but this is going to become public in the very near future. I’ll update here when that happens. The only thing United will say so far is that it is made up “seasoned airline managers.” Anyone want to take bets that these folks happen to have strong ties back to United in one form or another? It could even be related to the Champlain Enterprises team, now that we know Subodh Karnik is running ManaAir.
While KAir will own the majority of ManaAir, I’ll assume that they will have very little decision-making power. This is as close as United thinks it can get to having its own regional as long as that clause exists in the flight attendant contract.
This means that United is happy, because it now has a bigger regional closer to being under its control. SkyWest, by the way, should also be REALLY happy. Not only does it shed its perennial money-losing unit in ExpressJet, but it also strengthens its existing contracts with United and secures priority access to future flying that United will award. So everybody wins, right?
Don’t forget about labor.
For its part, the pilots are mildly supportive, but there’s a reason for that. This snippet from a union blast to pilots that went out yesterday sums it up well.
Exclusive UAX partners are a step in the right direction toward controlling our United Express product. The best long-term solution is to bring this flying to the mainline, with United pilots at the helm.
They’ve been pushing for that for awhile now, and I still doubt it’ll happen.
Then there are the flight attendants. I asked for a comment on this and was given a terse statement by Association of Flight Attendants (AFA) spokesperson Taylor Garland.
We’re reviewing the transaction and we will enforce our contract.
Of course, something similar is already being done with CommutAir, so it seems unlikely that flight attendants would have any leverage here. If so, it would have already been exercised.
Though we don’t know who owns KAir just yet, and I’ve probably completely confused you with this post, it doesn’t really matter. What matters is that United wants to have more control of its regionals for a variety of reasons, including a better pilot pipeline. This is as close as United can get toward making that a reality… for now.
The key word here is “Significant Part”. Within the investment community, this is determined as to who has “controlling interest” in the company, which is often owning 10% or more of a publicly traded company. In the offshore industry, the determination is based on who is the Ultimate Beneficial Owner.
In the event of a contract dispute, you can bet “Significant Part” will probably have to be defined by the courts down the road…….
KAir Enterprises is a Georgia based “corporation”. The address listed on it is the home address belongs to Subodh Karnik.
I hope he redecorated because that interior is pretty hideous (thank you, Zillow).
Too convoluted and psychobabel. Thank you, Scott Kirby (AA’s reject).
That’s great so United can have more pilots like this working at CommutAir? https://www.google.com/amp/s/www.nbcnews.com/news/amp/ncna890376
Beware all female pilots
You do realize the story you linked to was about a FedEx pilot, not anyone from United or CommutAir?
You should do and in-depth (multi part?) article on Skywest and how it works, makes money, why it dosn’t fly its own scheduled routes, etc…
Looks like a bunch of psychobabble to circumvent negotiated contract terms. And people wonder why management isn’t trusted.
Oscar Munoz came from CSX Transportation. The Class 1 railroads are famous for ‘following’ contracts to the letter and then going beyond if they think they can get away with it. Maybe Oscar is channeling his inner Hunter Harrison.
The real question is what this does for United’s ability to continue to operate the regional and mainline network it has including the numbers of mainline and various sizes of regional aircraft.
This might simply have been a cost-saving deal but there is likely more to the story than the convoluted ownership and FA union requirements.
I suspect it indicates a doubling down on UA’s part to maintaining a large 50 seat fleet and not moving toward a mainline 100 seat aircraft.
United pilots, hold firm on insourcing. It may take two contract cycles, but insourcing will bring tremendous captaincy growth as Delta ALPA is now experiencing.
At some point, could you do a post (or a brief comment here) explaining why it had been trendy in the past to sell off regionals, but now it’s trendy to buy them back?
I was trying to figure out how much CO sold ExpressJet for, but couldn’t find it.
I think Brett touched on it. Back in the day, when the airlines were starved for cash, they sold off these regionals to get some needed cash.
I still wonder why DL sold CP. That happened after the NW merger. My first guess is that CP Flight Attendants are union and DL is not.
I can provide a little insight on Endeavor/Delta. I worked there for about 7 years (including through the bankruptcy). When we exited bankruptcy, I got the sense that Delta acquired us because no one else was interested and Delta didn’t want ~200 airplanes to go away overnight. When we exited bankruptcy, the plan was to retire all CRJ-200s (~150 airplanes) and add 40 CRJ-900s to ultimately shrink to a 81 CRJ-900 only operator. This led to an exodus of pilots to other carriers. The company instituted a 20K/year retention bonus for four years which stopped the bleeding.
To wrap up the story, the pay plus some career development improvements for pilots along with new management, turned the airline into an attractive and well-run airline. These days regional carriers are struggling for pilots, being a wholly owned carrier means you can take advantage of some deeper pockets to retain/attract pilots.
One thing that I’m curious about with the deal is the “priority position” SkyWest now has for new dual class aircraft at United. United would still have to put out an RFP for new aircraft. I’d be curious to learn what that does to SkyWest’s proposal when the time comes.
LRK – I think it’s about cash, as others have mentioned. When times were tough, they looked at selling them off. But as regional performance and pilot pipelines have become more important, airlines have found value in acquiring them to have more control. I think they like having a mix of both owned and contracted operators. That’s particularly easy when you work with a solid operator like SkyWest. But I imagine over time other regionals will need to be acquired or fold if they aren’t part of a bigger operation.
You see the owned/contracted mix among trucking for some manufacturers and retailers. While many contract out all trucking, some companies run their own fleets to help put cost pressure on trucking companies or because of how specialized their businesses are.
Subodh is no longer the CEO of CommutAir. Announcement was made 12/17/18 that he was departing.
Announced 12/21 that Subodh Karnik will be the new CEO of ExpressJet.
Hrm, you’d think they’d just see about buying (then growing) Air Wisconsin. The FA’s there are already represented by AFA, so its not as if there would need to be any contract negotations or uncertainty.
But the contract the FA grounds enjoy and not comparable.
Hey Cranky, a minor correction: doesn’t mean “United flight attendants have to fly those airplanes” but AFA flight attendants; not all AFA flight attendants work for United.
btw, how about article on United gutting its Polaris before it’s fully implemented?
Hey – I’ll take a look at Polaris.
Any plans to lay out the actual ownership structure / purchase structure? Very interested to see how much of ExpressJet United actually owns and who actually “controls” ExpressJet.
Gigi – I don’t know any more details.
All the musical chairs outlined in this story?
Has reinforced my decision to quite flying for a Regional many moons ago, and leave the airlines entirely for a real career.
One that pays the going wage for human life (I earned $23,000 flying a CRJ),
and doesn’t require living in a suitcase.
That said…put the time in, and 10 to 20 years down the line, a flying for AA, UA, DL…and then a few more years…can lead to one the top 3% of airline jobs
….a super long haul driver. 4 days on, then two weeks off, for $250K+
Hmm..on second thought, not so good odds.
How do you make $1 million dollars?
Invest $1 billion in an airline :)
With a combination of fuel price variations, unions, economic cycles and more
..it’s a rotten business/amongst the worst ROIs on Earth.
Fix your article. Subodh was never CEO of CommutAir but is CEO of Expressjet