ExpressJet Holdings, Inc. Q4 2007 Earnings Call Transcript

ExpressJet Holdings, Inc. (XJT)

Q4 2007 Earnings Call Transcript

March 10, 2008 10:00 am ET

Executives

Kristy Nicholas – Director Communications

Jim Ream – President, CEO

Analysts

Michael Linenberg – Merrill Lynch

Duane Pfennigwerth – Raymond James

Bob Mcadoo – Avondale Partners

Sandra Arnoult – Air Transport World

Dan Mckenzie – Credit Suisse

Presentation

Operator

Good morning ladies and gentlemen and welcome to the ExpressJet’s fourth quarter 2007 and full year 2007 financial results conference call. (Operator instructions). I will now turn the call over to Ms. Kristy Nicholas. Ms. Nicholas, you may begin.

Kristy Nicholas

Thank you Lorraine, good morning everyone and thank you for joining the ExpressJet Holdings’ fourth quarter conference call. On this call we have Jim Ream, President and Chief Executive Officer and Fred Cromer, Vice President and Chief Financial Officer. Portions of this call may contain forward looking statements not limited to historical facts but reflecting our current beliefs, expectations or intentions regarding future events. A number of factors could cause actual results to differ materially from those in the forward looking statements. Additional information concerning risk factors that could affect our actual results is described in our filings with the SEC, including our 2006 10K.

During this call, certain non GAAP financial disclosures may be made relating to our performance measures. In accordance with SEC rules, we will provide a reconciliation to our most directly comparable GAAP financial measures on our website at expressjet.com. Jim will cover the operating and financial results for the quarter then Jim and Fred will take question. Now I’d like to introduce Jim Ream.

Jim Ream

Thanks Kristy. Good morning everybody. Well the quarter you know produced a loss of $27.6 million excluding the special charge that we took in the quarter, it was $31.7 million with the charges related to the write down in goodwill in our Wing Aviation investment, just kind of reflects kind of that broad pullback in market values of specialty aviation services. We just thought that it would make sense to kind of do a mark to market on the valuation of that company and put it into this quarter. I mean the results for the quarter reflect just the enormous challenge of our second full quarter of spooling all of our new flying and of course right in the middle of you know just a typically challenging quarter for the industry generally and then of course you’ve got you know the economic issues and just record fuel prices on top of it.

You know that said, you know we feel that we’ve made solid progress in all of our new ventures and continue to see improvements in all of these areas. With our pro rate flying for Delta you know mid December we added three aircraft to that flying bringing the total to 11 airplanes that we have working at risk for Delta out of LAX, the expansion out of LAX sort of increased departures by about 40% and brought on six new communities. For our branded service, you know the quarter reflects our continued efforts to improve our ability to sell, you know increasing our presence in these markets and then just evaluating each market pair’s demands.

You know we’re starting to get a better information to work with. And you know we finally have industry information from the third quarter, it looks that we kind of stimulated the market demand by about 50% in the third quarter and we gained about half that overall market share in the markets that we were flying there in the third quarter. It’s going to be a few weeks before we have the fourth quarter information but you know generally our selling capability was about the same in the fourth quarter as it was in the third. So the changes that we needed in our reservation system to give the travel agency community kind of that next level of functionality that they enjoy with other carriers.

We were hopeful it was going to be in place by the early part of the fourth quarter, the fact of the matter is, most of it occurred in the last couple of weeks of December and some moved into January. We actually brought up refund and exchanges in the tail end of December, sort of direct and interactive selling, we brought online by I think around the first part of February for [Saber] in particular and that brought Expedia Corporate Travel on when we got that up and going.

So on balance the fourth quarter to the third quarter is pretty consistent from what a travel agency would have been able to expect in functionality with our res system. As a result of that, we did see some downward pressure in our travel agency share in November and December as they’ve obviously dealing with folks that needed to have an ability to move their itineraries around through those heavy travel periods and they just decided to sort of wait until we got that functionality online.

As we did bring it online, we saw that market share start to regain back to where it was and continued to improve. We’re sort of real timing kind of measuring our performance in that area but you know we feel confident now that the travel agency community is becoming increasingly more comfortable with what our selling capability is and are starting to use us more and more. On the demand side, you know we continue to monitor each market is doing.

We did make a scheduled change in mid and kind of mid November to better match supply and demand, pull down our overall departure levels about 7% and again we’ve made an announcement of another scheduled change on April 1^st, you know in response to sort of demand and just generally where fuel prices are in kind of gauging just how much capacity do we want flying in this point to point operation here going through a very difficult time for the industry. You know as we look at March bookings, we’re pleased.

We think that not just in the quantity but the quality of those bookings. We’ve just made a lot of progress from where we were in the fourth quarter. And I think in particular how we’re kind of measuring ourselves right now until we get to a year over year basis is sort of just looking how are we doing in generating revenue on our aircraft versus sort of where the industry was benchmarked to revenue levels in the summer of 07. So we’re monitoring every month, starting to see how we’re doing versus the industry and then just sort of generally measuring the market level, how it’s doing to see if we need to make some changes there.

You know, like all carriers, the issue is becoming fuel and we’re going to continue to monitor that and as we come into the summer months you know just sort of verify that we’re just generating more cash operating the aircraft than not. And you know right now our best guess is that’s where we feel that we’re going to be.

So we’ve still got kind of enough flexibility in our planning to be able to kind of take a look at all the marginal performing aircraft on the point to point and look for other opportunities and we will continue to do that as we get into the summer and kind of really see kind of how things are going. But you know right now as we kind of approach our first anniversary, you know we feel like we’ve made a lot of progress and in a very difficult time and more importantly beyond kind of that sentiment of how we’re doing, it’s just generally looking at the cash flow and we feel that we’re going to be in a position to kind of demonstrate that we’re generating more cash operating the aircraft than not. Our charter group is continuing to expand the number of agreements that they have in place.

We expect kind of with the kind of the expected value and how those agreements look coming together that we may end up having to have about 15 aircraft working in there in the back end of this year. That obviously allows us to continue to redeploy aircraft out of the point to point system and you know we may ultimately end up with about 30 aircraft working in that system when we get to the fourth quarter.

For our CPA flying you know we did not achieve our targeted margins you know as expenses to fly the schedule were just higher than the rates that were established. You know the impact of the fourth quarter was about $15 million, so on top of everything else we’ve got going on in spooling our new businesses, the fourth quarter results were impacted by the fact that we did not get targeted margins with the flying that we’re doing for Continental. We’re now starting to kind of work earnestly in setting the 08 rates, we you know the process has been ongoing.

They had a lot of projects on their side that kind of slowed that up from kind of us going back and forth with them for a while, they’re now back engaged in it and we’re sending information. We expect to have that resolved here pretty soon and be able to kind of move forward in getting those rates in place. Finally, you know we closed the quarter with $214 million in cash and in the quarter we spent about $10.5 million repurchasing some stock and prepaying on the note we have, the convertible note. That kind of hits the high points. Lorraine why don’t we open it up to some questions.

Question-and-Answer Session

Operator

Thank you, we will now begin the question and answer session. (Operator instructions). Our first question comes from Michael Linenberg from Merrill Lynch, please go ahead.

Michael Linenberg – Merrill Lynch

Yeah, hi, good morning. I guess a couple questions here. First, if we just do the math, you have 50 airplanes in your branded and your Delta prorate and I think you indicated that you redeployed a few more this quarter to prorate. I guess when you were flying 220 departures in the branded, what were the number of airplanes and then at 200 and then going down to 172, I just want to get the exact numbers.

Jim Ream

We’ll, I think the K will obviously have a lot more information for you to build to kind of do a little better job of modeling things out Mike. But on balance we had you know before we did the November schedule change we had 42 lines of flight in the point to point operation and eight aircraft working for Delta, so we went down to 39 lines of flight and aircraft kind of dedicated when we made that change.

As we do the April change, you’re probably looking at effectively around 36 aircraft working in the point to point operation. And you know we’re probably from a utilization standpoint looking at kind of the lower 30’s. We’ll start redeploying aircraft into either charter on intro prorate options you know as we kind of continue to have conversations with several other carriers.

Michael Linenberg – Merrill Lynch

Okay and then at 36 though, is that just to do the math, is that at 14 at Delta or is the number actually less than that?

Jim Ream

Well right now we’re still at 11, we’re looking at some opportunities to maybe expand a couple of markets out of there that may eat up another aircraft and we’re in conversations with a couple of other carriers about whether or not we can provide some opportunities in and out of their networks.

Michael Linenberg – Merrill Lynch

Okay and then my next question is when you look at the lines of flying and so you’re at 42 and I think when you’re in April your 36 aircraft, what are the number of lines of flying you think you’ll be operating in April?

Jim Ream

You know right now, probably around 31 to 32.

Michael Linenberg – Merrill Lynch

Okay, 31 to 32. Now just, I don’t know if you can provide us this information and maybe if you do break it out in the 10K, but when we look at the segments, what percentage of those segments are profitable and maybe it’s just easier to say on a cash basis as opposed to the more conservative fully allocated business?

Jim Ream

I think where we’re hopeful, the only kind of forward point I’d say Mike, I mean obviously the fourth quarter and us only being at this for our second full quarter of operation, you know everything is going to be under pressure. There’s that bottom 25% you know where you’re going to work on and say it’s not just a selling issue or a presence issue, this is a demand issue. So we’ve got to do some things there. You know I think what we’re seeing now is that the markets are starting to bunch pretty close together. We’ve got points of strength out west, some more challenges the further east you go and we’re kind of working through that.

But I think everything is starting to behave in a pretty similar way and you know so when we get to the second quarter we’re hopeful that when you kind of put all the at risk line together that we’re generating more cash flying the aircraft than we are if we were to ground them. So you start kind of and you know with fuel being as high as it is, hitting our first anniversary and if we think that’s a pretty good point to be, so I think just from general experience, the markets are spooling as we would expect them to spool. You know obviously part of the, is masked somewhat by fuel just continues to move northwards. You know so we’re just somewhat dealing with sort of what the rest of the industry is looking at when you look at 08.

Michael Linenberg – Merrill Lynch

Okay, good and just one last quick one Jim and this is more sort of a philosophical question. You know let’s just assume that oil kind of sits around $100-$105 into perpetuity, I mean maybe it’s kind of the new model. That being said, it would seem like that the 50 seat aircraft, the economics of the 50 seat jet you know it does not make a lot of sense in a lot of markets and not just what you’re doing but what other people are doing and when I look out over the next couple of years it seems like a lot of regional contracts are up against their amendable dates.

And I’m just curious how do you think about your fleet today and maybe the possibility that you could actually be taking more 50 seaters from Continental in coming years and maybe how that changes just with oil prices where they are. I mean are you forced to completely rethink kind of your approach if oil prices stay where they are?

Jim Ream

Well it’s a big question Mike.

Michael Linenberg – Merrill Lynch

I know, it’s philosophical that’s why.

Jim Ream

You know, I would say that you know my experience of sort looking at it is that every airplane is going to be under pressure at $100 a barrel oil and you know really it’s a function of what I’ve tended to see over time is that you end up having to re-gauge the markets depending on trying to get the right revenue mix from the aircraft to offset an external spike like what we’re dealing with right now. So the 50 seater fits in that whole spectrum of fleet options when you’re looking to kind of how to maximize the performance on any given market pair.

So is the 50 seater working on every market its in now, you know no it’s absolutely not, but there’s going to be small narrow bodies that are going to face that same phenomena and so when your redeploy kind of how you want that network to look given where oil is, this is still a pretty useful asset. I mean it’s an aircraft that has a high per seat economics but it gets within striking distance of small narrow bodies which gives you an awful lot of flexibility. So I think from a broad CPA world, you know obviously the majors are going to want to make sure that this aircraft is adding value to their network and they’re going to want to make sure their partners are doing everything they can and that this is the right airplane for them. So I think everybody faces that strategic issue across any aircraft that you’re going to fly. On the stuff we’re doing on our own, you know you got a chance to kind of really match supply and demand.

And if you can get the right mix of passengers on there, even though the $100 oil, you’re going to do as well as you would do with any other aircraft. The bigger the aircraft, the more you’re going to have to have folks on that aircraft that aren’t paying a lot of money for those seats and they tend to be a little bit more susceptible to pricing sensitivities and folks that actually got to get somewhere. So I’m not sure what aircraft I want at $100 a barrel oil but I think the 50 seater is just naturally more limited than any other aircraft.

Michael Linenberg – Merrill Lynch

Okay, good, thank you.

Operator

Our next question comes from Duane Pfennigwerth from Raymond James, please go ahead.

Duane Pfennigwerth – Raymond James

Hi, thanks for taking the question. Just wondered and maybe I missed it in the press release but what was revenue for the branded segment in the quarter?

Jim Ream

Well you’ll need to take a look at the K where you’ve got all the lines sort of broken out there. Rather than just start barking numbers out in space, that would be the easiest thing for you to look at.

Duane Pfennigwerth – Raymond James

Okay, I guess you broke that out last quarter and then just generally can you talk about average fare this quarter for branded?

Jim Ream

You know it was up in kind of the upper 90’s for the quarter, so slightly higher than where we were in the third quarter. The point to point did better than that and we’ve moved more aircraft over to the prorate flying, sort of west coast north south stuff. A little bit longer stage length, so it had a little bit more pressure on it from a RASM standpoint in the quarter. So the RASM performance on the point to point did you know a lot better than where we ended up on the prorate side but you know obviously you have less spool issues on the prorate as we moved airplanes into LAX.

Duane Pfennigwerth – Raymond James

Okay, great and could you give us an update on where or how much of that convert left is left to be taken out?

Jim Ream

$134 million.

Duane Pfennigwerth – Raymond James

Okay, so if fuel remains at these levels, given the cash burn that you’re seeing here, how do you avoid going into Chapter 11?

Jim Ream

Well I think you know as we look at things, we feel that this year you know, obviously you’re looking at a bad quarter, quarter four is going to be bad, first quarter is going to be bad, second and third quarter you know we don’t think is going to be as bad. And so when we look at kind of how much capital we need to spend in 08, sort of the improvement we’re seeing in all of the lines of business, the fact that we’ve got about 80% of our fleet under CPA flying. You know I think from a liquidity standpoint we feel pretty comfortable with 08. So in this year where the economy is and where fuel is, it’s not a bad spot to be.

Duane Pfennigwerth – Raymond James

Thank you.

Operator

Our next question comes from Bob Mcadoo from Avondale Partners, please go ahead.

Bob Mcadoo – Avondale Partners

Yeah most of my questions have been answered, just when do you expect to file the 10K?

Jim Ream

By the end of this week, certainly by the 17^th is our current plan, so in the next couple of days we’ll kind of finalize everything and then you’ll see kind of more detail obviously in that document.

Bob Mcadoo – Avondale Partners

Okay, thanks, that’s all I had.

Operator

Our next question comes from Sandra Arnoult from Air Transport World, please go head.

Sandra Arnoult – Air Transport World

Good morning Jim, I was wondering, are you getting pressure from shareholders to reduce further this branded flying operation? I had seen a couple articles about that. And how low can these numbers go? You’re going to go down to 36 aircraft. What kind of fleet do you need to make this a viable operation?

Jim Ream

Well I think what was, it was enormously difficult to take 42 aircraft and deploy them as quickly as we had to do it. I mean it hasn’t been done in this industry before. So it was very hard to do. So any chance you have to kind of look at some other opportunities where you don’t have as much spooling as you tend to have with as many new markets as we’re working in, just takes a little bit of pressure off of us. We are seeing kind of point to strength, we’re also seeing some markets out there that we’re looking at and saying I’m not sure this is going to be successful in this current fuel environment.

So you know the negative of it is, we had to spool very quickly, a lot of aircraft, a lot of new markets, nobody knew us, brand new res system, needed a lot of work on it. I mean the good is that all those things are kind of fixable. And you’ve got a little bit of a blank sheet of paper here to kind of move assets around as you have an opportunity to see whether it’s working for another carrier or in kind of finding another market where this aircraft could work a little bit better, change and kind of the frequencies. You’ve got more flexibility to move around with this kind of this portfolio of businesses that we’re working through right now.

And you know so I think we’ll, we will I think we’ll ultimately be able to manage this to a point where it becomes not the issue that it is immediately. But you know it was a big challenge to work through in 07 and the first quarter of 08, it’s going to have the same kind of challenges the rest of the industry is. But I think when you start looking at sort of where the bookings are going into the second quarter and how we’ve been able to improve our presence in those communities, there’s a lot to be happy about when you see what we’ve done in just our first year of going at this.

Sandra Arnoult – Air Transport World

Okay, thank you.

Operator

Our next question comes from Dan Mckenzie from Credit Suisse, please go ahead.

Dan Mckenzie – Credit Suisse

Hi, good morning guys. You know I’m just wondering if you could answer just a couple questions. I’m wondering what you’re seeing with respect to competitor pricing if you could just talk a little bit about the competitive dynamic.

Jim Ream

Right now it hasn’t been so noticeable that we think it’s one of the bigger issues that we’re working through right now. I think we’ve found a niche that we can fill with sort of the right aircraft to do it and I think on balance, most of the other networks that are out there are kind of concentrating on their own strengths and are not really paying as much attention to us as you thought maybe might have been the case when we first launched into this.

I think some of it is, we try to be a good competitor, we’ve gone in with fare levels that make sense and not trying to just sort of drive load factors to a point that we really didn’t end up driving any value from a RASM standpoint. And again I think the value we bring to the market pairs that we’re flying is a fare amount that’s difficult to replicate if you’re going to drag folks over a connecting hub. So I think on balance we’ve kind of found a little bit of a home here and we’re not really dealing with a lot of competitive pressures.

Dan Mckenzie – Credit Suisse

Interesting. And then I guess given the supply demand dynamic which you referenced in your markets, I’m wondering if you could provide some perspective on the PDEWs, the passengers daily each way, where you feel you have a sweet spot given all the network changes that you guys are implementing here.

Jim Ream

Well I think as we get into the second quarter you know again in our ability to continue to manage the inventories that is available on sort of working that average fare up, you know we’re getting into a quarter that we think will start moving up into that 35 range, that’s kind of where we think we need to be at this point in our lifecycle on this project. And on balance I think you know that’s kind of what we’re seeing.

Dan Mckenzie – Credit Suisse

Okay, good, thank you.

Operator

Mr. Ream I am showing no further questions at this time.

Jim Ream

Okay, well thank you, we appreciate everybody following us and you know we look forward to 08 continuing to improve upon where we are currently and bringing some real value to all of our shareholders. Thank you.

Operator

Thank you ladies and gentlemen, this concludes today’s teleconference, thank you for participating, you may now disconnect.

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