ExpressJet achieves 4Q2009 profit, but not from operations

"Compared to where we are today versus last year, we have improved," said Interim President and CEO, Pat Kelly, adding most did not expect the company to survive. "Our stock price year ago closed at USD1.19 which gave us a market capitalisation USD21 million. Now it has been trading around USD4, giving us a market capitalisation of USD80 million compared to our book value of USD200 million. Clearly we've made progress, but we still have a ways to go." Later, one of the analysts agreed that the stock was undervalued.

Its full year net loss of USD1.6 million, was significantly reduced from USD3.3 million in the previous corresponding period, due to special items. For the full-year 2009, ExpressJet earned USD688.2 million in revenue, including USD597.4 million in passenger revenue for scheduled flying, USD56.7 million through Corporate Aviation flying and USD34.1 million in aviation services.

ExpressJet ended 2009 with USD107.8 million in cash, cash equivalents and short-term investments. The cash balance included USD17.7 million in restricted cash and USD9.1 million in short-term investments, primarily auction rate securities, after accounting adjustments to impair the value of these assets.

Quarterly results

ExpressJet generated USD168.8 million in revenue during 4Q2009 compared to USD160.5 million for the same period last year, as block hours and utilisation improved by 7%.

Under the capacity purchase agreement, Continental paid ExpressJet USD148.6 million in block-hour revenue and pass-through expense reimbursements for 4Q2009 versus USD142 million in 4Q2008. However, ExpressJet is paying Continental incentives to increase its flying. Consequently, the 4Q2009 payment is net of a USD1.1 million incentive to Continental. The payments are expected to increase during 2010 and 2011 to a maximum of USD10 million, according to the agreement. For increased utilisation, the company could owe up to USD8.9 million to Continental.

Its operating loss for the quarter was more than that experienced in 4Q2008, largely owing to 4Q2009 operating performance, including reduced utilisation, rising labour expenses and low attrition. It also incurred lower than expected Consumer Price Index adjustments which affected block-hour revenue rates in its Continental Express capacity purchase agreement. The expected increase, based on historical inflationary cycles, was 3% but the increase on the anniversary of its amended CPA was only 2%.

"We are disappointed with our fourth quarter operating losses given the strides we've made to transition our company and the hard work of our employees," said Mr Kelly. "We ended 2009 on a high note with the award of a new agreement with United Airlines that will assist us in returning to positive cash flows during 2010. In 2010, we will focus on controlling costs, continuing to provide our customers with exceptional service and successfully executing our business plan. Increasing productivity through flying as United Express is a key component to generating positive, operating cash flows during 2010. We expect block hours to increase between 10% and 15% as a result, and to establish a run-rate during third quarter 2010 after all aircraft are in place and start-up costs are complete."

The pass-through expenses in the United deal includes aircraft rent on a block-hour rate reimbursed, as well as engine power by the hour, heavy maintenance, line maintenance, catering, interrupted trip expense and most labor costs. It also includes fuel, aviation hull and liability insurance and property taxes under direct costs. Subsequent to quarter end, as part of the United Express agreement, the company issued a warrant to United for the purchase of 2.7 million shares of common stock with an exercise price of USD0.01 per share of common stock. United can exercise its rights at any time throughout the term of the agreement.

The company moved aircraft now used in its charter operation to its United operation and is also subleasing eight additional aircraft from Continental.

Higher labour costs

In discussing its rising costs which outran revenues, the company cited the fact that historically participation in the benefit program was about 80% but now is at 90%. It attributed this to the lack of attrition with a high pilot turnover rate which is typical among regionals. Kelly indicated that, in 2008, 304 pilots left, but with the advent of major-carrier hiring freezes coupled with furloughs, the 2009 number is only 41. "Higher seniority drives higher labor costs," he said. "We expect that to continue this year and it is also why we continue to focus on cost management."

Under its capacity purchase agreement with Continental, ExpressJet flew 165,942 block hours using 214 aircraft during fourth quarter 2009, down 2% on seasonal changes compared to 3Q2009. Year-over-year, daily utilisation within the Continental Express fleet totaled 8.4 hours in 4Q2009, up from the eight hours in fourth quarter 2008. The company expects Continental utilization to increase further in 2010.

In fourth quarter 2009, ExpressJet generated 2 billion revenue passenger miles on 2.6 billion available seat miles producing a load factor of 78.2% under its agreement with Continental. For the full-year 2009, ExpressJet flew 656,790 block hours as Continental Express compared to 686,684 during the same period in 2008. Full-year results for the Continental Express operation totaled 7.8 billion revenue passenger miles and 10.1 billion available seat miles equating to a load factor of 77.4%.

Charter operations weaker

Revenue earned during the fourth quarter 2009 in the Corporate Aviation (charter) division totaled $9.8 million. This revenue does not include revenues generated from the United Express operation. Revenue earned by operating as United Express during December 2009 was recorded as passenger revenue due to the anticipated execution of the multi-year arrangement with United that occurred on February 17 and had an effective date of 01-Dec-2009. Fourth quarter revenue from aviation services (ground handling and other) totaled USD8.1 million versus USD9.4 million in 4Q2008 primarily because ExpressJet sold a composite business during 2009.

ExpressJet flew 2,402 block hours during the fourth quarter, which is historically a seasonally weaker quarter for its charter division. Utilization declined from an average of 38% during third quarter 2009 to 33% during fourth quarter 2009. ExpressJet expects this trend to improve as aircraft transition from the charter operation to higher utilisation flying as United Express. During the quarter, ExpressJet operated 30 aircraft within its charter division, including eight 41-seat aircraft.

Block hours generated within Corporate Aviation for the 12 months ending 31-Dec-2009 totaled 18,871, including 9,622 block hours flown for United during a short-term Summer flying arrangement.

Aviation Services

During the quarter, ExpressJet added two new ground handling contracts and now has a total of 42 contracts at 30 stations. Total activity during the quarter as measured by aircraft turns was 19,137. ExpressJet also began an aircraft cleaning contract for Continental operations within Terminal B at George Bush Intercontinental Airport during December. However, it sold its composite company earlier in the year and said it would be opportunistic if something were to present itself to gain cash if needed.

ExpressJet operated a total of 244 aircraft during 2009. ExpressJet expects its 2010 fleet to equal 244 50-seat aircraft including 206 in the Continental Express operations, 32 for United this year and 16 in its Corporate Aviation division.

During the quarter, ExpressJet monetized auction rate securities with a face value of USD20 million and realised USD18.1 million in proceeds through these transactions. ExpressJet intends to continue monitoring the auction rate securities market to attempt to monetize its remaining USD11.1 million face value balance and continued litigation against Bank of America Corporation related to auction rate securities sold to ExpressJet in Jan-2008.

ExpressJet made no repurchases of either its 11.25% Secured Convertible Notes due 2023 or common stock under its approved securities repurchase program during 4Q2009. The total remaining in the program is approximately USD9.7 million. The company expects any future purchases of the notes or stock to be made periodically in the open market or in privately negotiated transactions. Analysts express concern about the preparations to meet its obligations on the notes.

ExpressJet ended 2009 with an outstanding balance of USD52.1 million of its 11.25% Secured Convertible Notes due 2023. This balance represents the par value due to noteholders when the notes become due 01-Aug-2023. In Dec-2009, the debt trustee approved ExpressJet's request to remove approximately USD39.9 million in spare parts and approximately USD58.6 million in spare engines from the collateral pool creating an unencumbered asset pool totaling approximately USD98.5 million. Following the trustee's approval, USD39.5 million in spare parts and USD35.3 million in spare engines remain in the collateral pool encumbered by the notes.

Capital expenditures during the quarter totaled approximately USD1 million compared to USD1.6 million during 4Q2008. Full-year 2009 capital expenditures totaled USD4.9 million versus USD10.6 million during 2008. ExpressJet expects capital spending to range from USD9 million to USD11 million during 2010 to meet operational requirements, including the additional flying as United Express.