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Continental Could Take Back 69 Jets It Leases to Other Carrier

Posted on: Wednesday, 28 December 2005, 21:00 CST

By Richard Newman, The Record, Hackensack, N.J.

Dec. 29--The once-cozy relationship between Continental Airlines and its short-haul operator, ExpressJet, is showing some strain.

Continental said Wednesday that it will exercise an option to take back 69 of the 274 small jets it leases to ExpressJet for Continental Express flights, and shop for another carrier to take over that service in early 2007.

Continental, which used to own a majority stake in the regional carrier, is essentially trying to use its muscle to win better financial terms from ExpressJet for its services, which include providing flight crews for Continental Express flights.

ExpressJet handles about 10 percent of the passenger traffic at Newark Liberty International Airport, more than any other carrier but Continental.

Mike Boyd, a consultant in Colorado, said Continental is in a position to put considerable pressure on ExpressJet, because Continental is virtually its only customer, and there is limited demand from major carriers for regional service providers.

"They are just vendors, and there are too many of them out there," he said.

For years Continental and ExpressJet have coexisted in a symbiotic relationship.

Continental leases planes to ExpressJet and then pays ExpressJet to fly passengers under the Continental Express logo at a fixed rate.

The planes, Brazilian-made Embraer regional jets with either 35 or 50 seats, are used to feed Continental's hubs in Houston, Newark and Cleveland, and to make many of the airline's shorter flights between cities in the United States, and to Canada and Mexico.

Both companies are based in Houston, and when Continental furloughed hundreds of pilots during the travel slump after the Sept. 11 terrorist attacks, many took jobs at ExpressJet under union agreements.

Continental used to own 53 percent of ExpressJet but in recent years has been selling off its stake to raise capital and make contributions to pension funds. Continental now holds just an 8.6 percent stake in ExpressJet.

Meanwhile, other major airlines, including some operating in bankruptcy, have wrested lower rates from their regional affiliates, which Continental fears could give them an edge.

In a letter to ExpressJet CEO James Ream, Continental said "the rates that the market will pay for regional jet services are declining rapidly."

ExpressJet has nine months to decide whether it will continue to lease the 69 jets -- at higher rates than it is now paying -- or return them to Continental.

ExpressJet said in a statement that it is still negotiating with its once paternal partner, and if talks extend beyond the end of the year a new agreement would be retroactive to Jan. 1, 2006.

ExpressJet spokeswoman Kristy Nicholas said the company may indeed renew the lease on the 69 planes, and could put them into service for other airlines, or use them to start an independent airline.

"We do have the option to do that," she said.

Continental said one condition of the lease offer is that the 69 planes not be used in any of Continental's hubs.

If no agreement can be reached, more planes could be withdrawn at some later date, said David Messing, spokesman for Continental. Or, if ExpressJet agrees to terms more favorable to Continental, the relationship could be sustained at the present level of planes, he said.

"We'd be open to ExpressJet coming back to us with an offer that brings them in line with market rates," he said.

Boyd said that if negotiations break down, candidates to take over the leases from Continental include Mesa Airlines, SkyWest and Chautauqua.

Continental lost $363 million last year, and expects to record a loss for 2005.

ExpressJet, which like other regional carriers has prospered in recent years, reported a $25 million profit last quarter.

Continental Airlines shares which have been on the rebound lately, fell about 1.8 percent Wednesday to $21.18. Shares of ExpressJet plummeted $2.31, or more than 21 percent, to $8.32.

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Copyright (c) 2005, The Record, Hackensack, N.J.

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CAL, SKYW, RJET, MESA, XJT,

Source: The Record - Hackensack, New Jersey

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