Archive for the 'Expressjet' Category

Guest Post: SkyWest and ExpressJet

Published
by
Dan Webb
on August 16, 2010
in Expressjet and SkyWest
. 2 Comments

Well, here’s another guest post from my friend Courtney – this time he shares his thoughts on SkyWest/ExpressJet, which are a bit different from mine:

I almost didn’t post this week because so many people were covering the Skywest acquisition of ExpressJet and, wouldn’t you know it, that was what I wanted to blog about. I finally decided to throw caution to the wind and post my verbose rendition of what it means now that Skywest has an accepted offer to acquire ExpressJet.

The deal makes a ton of financial sense, but strategically we’ve been focusing on the wrong things. The intrinsic value of XJT is about $150-$180 million and Skywest paid about $133. Heck, they offered $180 two years ago with a crappier CPA agreement, and ExpressJet turned them down. They’ve got about $70 million cash that can be applied directly back to the investment. I’m surprised Warren Buffet didn’t jump on ExpressJet at those prices. Why didn’t he? He’s too smart to touch an airline, but I digress. With all of the lawsuits out from the ExpressJet shareholders, I would expect the purchase price to rise North of the current offer.

I’m surprised Warren Buffet didn’t jump on ExpressJet at those prices.

So financially, this immediately makes sense, but the strategy behind it is where the interesting stuff starts to poke it’s head out of the woodwork. First of all, this isn’t consolidation. I read articles about how the airlines are consolidating, and while it’s technically true, there is no real consolidation going on. These are CPA agreements, not competing airlines in charge of their own network. Nothing will change. The overhead savings on a 250 aircraft fleet is infinitesimal and shouldn’t even be counted. So that leaves 696 aircraft when you count Skywest and ExpressJet separately, and 696 aircraft when they’re together.

Photo Credit: ExpressJet

So what are Skywest’s plans with ExpressJet? Beyond the actual intrinsic value Skywest was able to extract from ExpressJet, there’s very little, what I would call intrinsic strategic value. A mixing of terms, I know but bear with me. ExpressJet, in their current strategy, has very little value other than a declining future. The reason? The 50-seater is dead. Skywest might as well have bought a dealer lot full of Edsel’s.

The 50-seater is dead. Skywest might as well have bought a dealer lot full of Edsel’s.

So Skywest gets to diversify their operations, which they don’t really get to do because diversifying between two companies who become the same company is exactly the opposite of diversifying. A saying comes to mind about a whole lot of eggs and one basket. Assuming the UA/CO merger goes through, which is all but a foregone conclusion, Skywest will have exactly the same number of partners it has today. As for bargaining power, perhaps. But I would suggest lessons learned by airlines such as Delta during the Comair strike have taught the industry to not let any one carrier have too much power. Besides, the regional industry is a commodity. Considering that the remaining financially solvent competitors to Skywest all have solid operations, the only thing left is price, and Pinnacle or Trans-States can compete just as easily on price as Skywest can.

Of course there will also be one less competitor, which is convenient, but let’s be honest: when has ExpressJet really ever competed against Skywest? Ok, they won the 22 50-seaters at United, but again…50-seaters. They’ve no experience nor ability to successfully compete where Skywest sees it’s future; in the 70+ seat categories. ExpressJet has effectively competed with Skywest on new aircraft CPA’s as successfully as Skybus. Ok, I retract that. Nobody should ever be compared to Skybus, and ExpressJet is one of the best run airlines around, but competitively, you get the hyperbole.

I’m convinced the negotiations to make this deal happen didn’t take place between Skywest and ExpressJet, rather Skywest and Continental.

All that being said, there is value in ExpressJet’s remaining 50-seat CPA with Continental, which Skywest will be able to extract, but that’s only guaranteed to end. So exactly where is this “extrinsic strategic value” I’m alluding to? I’m convinced the negotiations to make this deal happen didn’t take place between Skywest and ExpressJet, rather Skywest and Continental. from Aviation Week:

“SkyWest has reached a 10-year deal with Continental, ExpressJet’s biggest regional partner, to operate 206 aircraft. Continental is either the head-lessee or the owner of these aircraft, and the deal allows Continental to drop aircraft as their leases expire. But SkyWest has retained replacement rights for those aircraft, Rich said.”

Aha! This is better than removing a competitor, it’s removing all competitors. They essentially have exclusive rights to upgrade ExpressJet to 70-seaters, should it become available. Scope clause negotiations aside, Continental wants and needs 70′s. Skywest has guaranteed they’ll have first stab at replacing a 206 aircraft fleet. Does that mean 206 70-seaters, I don’t know, but if it’s half, or even a quarter of that, it makes a whole lot of sense for Skywest, especially when you consider Continental is on the hook for the 145 leases, not Skywest. We have a technical term for this in the industry: “cha-ching.”

Did Skywest just lay the Queen of Spades on Trans-States’ MRJ LOI?

What does this mean in a merged United world? The details of the new CPA are of course confidential, but I would have to think it becomes interesting when New United brings on more 70′s. If ExpressJet 145′s happen to be leaving the property at the same time then are any new 70′s replacement aircraft? If so, does that exclude Trans-States? Me thinks it might. Besides, Trans-States won’t be replacing any 50-seaters at new United. They don’t have any. Which begs the next question. Did Skywest just lay the Queen of Spades on Trans-States’ MRJ LOI?

So let’s review the new competitive landscape. Skywest has exclusive 50-seat replacement rights at Continental. Trans-States can bid on current United replacement flying (of which Skywest now flies 100%), but not much else. Pinnacle has the Q400, which has been quite a boon for them, but the question still remains whether that will be considered ExpressJet replacement flying in the future, in which case it appears Skywest might have first crack. Republic is out of the game. Nobody’s going to sign a cost-plus CPA with a direct competitor, especially United with Denver. That leaves Mesa (probably sold off to the highest bidder. Skywest?), Air Wisconsin (completely out of the 70-seat competition), and… well…that’s about it.

We shouldn’t be surprised after the deal they got from Delta in 2005 with ASA.

What’s next? There are three airlines publicly up for sale: Mesa, American Eagle, and Comair. Mesa’s up a creek, which poses a Skywest-esque opportunity. Eagle would finally diversify their customer base to the three legacies up from two. As for Comair, Skywest CFO Rich has expressed interest. Again, the deal won’t be Comair, it’ll be the renegotiated CPA with Delta. Watch that one closely.

I would consider the ExpressJet deal a coup. The perceived value of the deal is not the true value, and no surprise, Skywest is again the winner. We shouldn’t be surprised after the deal they got from Delta in 2005 with ASA.

United breaks guitars, American kills puppies, and Skywest stages airline coups. Sounds about right.

Courtney is the co-creator of the Airplane Geeks Podcast, founder of AirlineEmpires.net, currently works for a commercial aircraft OEM, and is a self-proclaimed stud muffin. You can contact him through the Things in the Sky contact link.

Some Thoughts on SkyWest And ExpressJet

Published
by
Dan Webb
on August 9, 2010
in Expressjet, SkyWest and United
. 0 Comments

I swear. I’m cursed. A big announcement always happens at the worst time for me – like during an exam period at school or, in my case last week, when I take a day off of work when SkyWest decides they want to buy ExpressJet, where the Continental Express provider will be merged into the Atlantic Southeast Airlines (ASA) division. I figure by now everyone has heard about the story, so I wanted to share some thoughts.

The news probably isn’t a huge shock to anyone considering SkyWest tried an acquisition that failed back in 2008.

So why do it again? I see a couple of reasons.

One is diversification. SkyWest’s flying is (roughly) split 50-50 between Delta and United, with a smidge of that for the small operation out of Milwaukee for AirTran. Adding another carrier to the mix helps SkyWest as it mitigates risk – if a carrier is to duck out, it represents a smaller part of SkyWest’s operation.

But this move makes a lot more sense to me if we look at this deal in the context of the Continental and United merger, which still looks on track to close later this year. For fun, I decided to figure out what regional would have the biggest share at a merged carrier, if everything were to continue as it did today. This graph is organized by parent company, so SkyWest, ASA, and ExpressJet are all rolled up into one, here.

A couple of caveats – the graph does include the 10 ERJs ExpressJet is flying for United this summer. Also, I’m including at-risk/pro-rate flying as well, which SkyWest does with some CRJ-200s and E-120s for United, and what Colgan does with its Saabs for both airlines. I figured that it can be hard to figure out how much is at-risk or under a CPA, especially with some of the smaller airlines. Which leads me to another exception – in many cases it’s a bit hard to find a very accurate fleet count for some of these regionals, so this is my best guess.

Either way – I think the point gets across. SkyWest will be a very powerful regional partner with a lot of bargaining power at a merged United, assuming it goes through. Let’s break down that 68.6% for Skywest. That’s composed of 36.7 points worth of ExpressJet, and 31.9 points for SkyWest.

So, basically, SkyWest more than doubles its presence at a merged United by acquiring ExpressJet. That makes them very powerful, and dare I say it, more irreplaceable. When all the divisions are combined, SkyWest now has over 400 regional aircraft at the combined carrier. There are other players out there for sure, but replacing that many aircraft would probably require a decent-sized order, perhaps with the cash of the mainline partner.

But what about the future of ExpressJet here? Many have (rightly) said that there are too many smaller RJs in the market and the planes just aren’t all the attractive. And the fleet of ExpressJet E135s sitting out in the desert is a testament to that. 70-seaters have been all the rage for the past couple of years.

Unfortunately, ExpressJet has a very uncompetitive fleet as they’ve been wedded to the Continental scope clause, which doesn’t allow larger regional jets. (Hence the use of Q400s.) So why buy the airline? And what happens in the future?

Well, SkyWest got a ten-year capacity purchase agreement from Continental, so they can put off worrying about it for awhile. Plus the ERJ’s are Continental’s problem – even better.

As to the future fleet, more 70-seaters are natural, but the exact future is completely up in the air right now thanks to the merger. I am very interested in how the scope clause at the new United looks. As I mentioned earlier, Continental can’t use large RJs, while United has a crapload. Scope will undoubtedly be a big issue as a single contract for both pilot groups is worked out.

Meanwhile, I wonder what the feelings are among ExpressJet employees right now. I get the sense that things haven’t been the greatest ever since the airline’s attempt to go independent didn’t work out all that nicely. On one hand, there will be a loss of seniority, but this does look like a more stable future.

ExpressJet to Pick Up Flying for United

Published
by
Dan Webb
on November 16, 2009
in Expressjet and United
. 0 Comments

It was recently reported that Mesa would stop operating 26 CRJs for United Express, but United has already found replacements for them. First, it was announced (along with United’s third quarter results) that SkyWest was lending them some cash, and at the same time SkyWest-subsidiary ASA would start flying 14 CRJs for them next year.

Today, United has announced that ExpressJet will be doing some flying for them. ExpressJet’s 10-Q, filed today, explains the deal best:

United announced today that we were awarded a multiyear arrangement to fly 22 ERJ-145 aircraft as United Express beginning May 1, 2010. The arrangement will have an initial term of three years for 11 aircraft and two years for the remaining 11 aircraft, and will have a renewal option, at United’s election, for additional periods up to a total term of five years. From May 2010 through October 2010, we will fly an additional 10 aircraft for United in the current ExpressJet livery. These aircraft will be sourced from our corporate aviation division and as necessary, leased from alternate sources.

Prior to May 1, 2010, we will operate up to 22 aircraft under a short-term arrangement for United to assist with the transition of flying from their previous partner. The aircraft, crew maintenance and insurance (ACMI) arrangement will begin with three aircraft on December 1, 2009 and increase to 22 aircraft by March 2010. These aircraft will also be sourced from our corporate aviation division.

Another interesting note in the ExpressJet filing is this:

We anticipate that the definitive agreement with respect to the multiyear arrangement will include a grant to United of 2.7 million common stock warrants with an exercise price of $0.01 per share of common stock and that all related documents will be executed in the near future. Once executed, we will file a Current Report on Form 8-K with respect to the definitive agreement.

Hmm, is this ExpressJet’s way of pulling a SkyWest by giving United some kind of liquidity?

But, anyway, United has found a way to cover all of that lost Mesa flying. This is good for ExpressJet, which has had trouble picking up flying ever since Continental dropped some of their service a couple of years back. Right now, ExpressJet has 30 aircraft for charters, so this deal will leave eight for that service.

While the press release and SEC filing didn’t mention anything about employees, I am sure all the furloughed ExpressJet employees are pretty happy right now.

AirTran, Spirit, and Expressjet Make Cuts

Published
by
Dan Webb
on July 9, 2008
in AirTran, Expressjet and Spirit
. 0 Comments

Despite having a very good June in terms of traffic, AirTran will be making staff adjustments, as initially reported last week. 180 pilots and 300 flight attendants will be going away, though the airline will allow some employees to leave voluntarily in exchange for some benefits to be continued for a few months, which I guess is better than a regular lay-off.

Spirit is retiring five A319s, tinkering with the schedule, and reducing staff. Only two destinations, Islip and Providenciales, are going away, though, while Punta Cana and Grand Cayman will only see seasonal service. A big chunk of Spirit’s Caribbean and South American traffic comes from leisure passengers. It has been predicted that leisure traffic will decrease due to the current economic state of affairs. But maybe I’m overreacting a bit. It’s never easy to get a good idea of what’s going on there because Spirit is a private company and doesn’t release too much information to the public when compared to other airlines.

And finally, Expressjet pushed out a press release yesterday announcing that its own branded operation is closing down on September 2. Charter services will continue, though. Oh well. They had a decent business plan, but flying 50-seaters with fuel prices like these isn’t that profitable (something many were concerned about when this concept was first launched). In the end, all of Expressjet’s scheduled passenger services will be for Continental. The more things change the more they stay the same, huh?