New Continental Agreement Shores Up Carrier's Standing

Given the recent announcement of a new capacity agreement between Houston-based ExpressJet, and Continental Airlines -- its largest customer by far -- things appear to be looking up for the regional airline, at least as much as they can be in the current economic climate.

ExpressJet executives received another bit of recently, as well. Rival SkyWest dropped its purchase offer for the airline last Friday, after having an earlier offer of $3.50 per share soundly rejected in April.

It was clear ExpressJet management wanted the airline to remain indepedent... though, at that time, it seemed unlikely the carrier would be able to remain so, and stay in business. The Continental agreement shores up ExpressJet's finances, however... and as a result, makes the carrier less attractive for SkyWest to purchase.

"The execution of a new ExpressJet capacity purchase agreement removes a fundamental component of our offer," SkyWest Chief Financial Officer Bradford Rich told Forbes.

As ANN reported, ExpressJet and Continental signed a new, seven-year deal last week. Under terms of the agreement, ExpressJet will continue flying 205 regional aircraft for Continental for the foreseeable future.

Perhaps more importantly, the deal signaled an easing in tensions between the two carriers. Once a subsidiary of Continental, ExpressJet was spun-off as a separate entity in 2002 under an IPO that raised some $500 million. Under that deal, ExpressJet continued flying exclusively for Continental... but things changed when Continental tried to renegotiate its contract due to higher fuel prices.

ExpressJet -- which at the time purchased fuel from Continental at 71 cents a gallon, less than 25 percent the actual market price -- balked at that plan. As a result, Continental began taking business, and planes, away from the airline... but ExpressJet held firm, starting its own branded service in 2006, and offering its services to other carriers as well.

The new agreement brings the fuel prices in line with what other regionals pay, which benefits Continental... while guaranteeing ExpressJet a steady stream of business.

As for SkyWest, it plans to stay busy flying code-share flights for Delta Air Lines and United Airlines. "This [purchase] wasn't critical for SkyWest," Prudential Equity analyst Bob McAdoo, "this one happened to pop up, but the thing that brought it along was fixed and now we move on."

FMI: www.expressjet.com, www.continental.com, www.skywest.com