ExpressJet: Probably Toast

Most of the time I have relatively little sympathy for troubled companies. But sometimes they just seem to run into so many body blows simultaneously that you've just got to wince a little. And ExpressJet is one of those cases.

Yes, ExpressJet is suffering from high oil prices, as all airlines are. But it is also suffering from something entirely unrelated: the seizing-up of the auction-rate security market, where it parked $65 million of much needed cash. That cash is now unavailable, and ExpressJet has taken an $8.7 million charge against that money - valuing the "cash-like" auction-rate securities at less than 87 cents on the dollar.

Oh, and we're not done yet. Remember how Frontier Airlines [FRNTQ] was forced to declare bankruptcy after its credit card company imposed a "holdback" of 50% of all credit-card sales? Well, ExpressJet's credit card company imposed a 50% holdback on December 31 - and then increased the holdback to 100% at the end of March! (The details on the holdbacks come from an Aviation Week story which isn't online but which was sent to me by Joe Brancatelli.)

Basically, ExpressJet has precious little cash coming in, because its credit card company insists on holding it all until the passengers have actually flown. And it can't use a large chunk the "cash" it has lying around, because most of that is tied up in illiquid auction-rate securities. All while oil prices continue to hit new highs.

ExpressJet recently rejected a takeover bid from SkyWest (SKYW). If I was SkyWest, I might just think about buying up a large chunk of ExpressJet debt on the cheap right now, in the expectation that I could convert it into equity come the inevitable bankruptcy. After all, has any airline ever recovered without declaring bankruptcy from a situation where it was operating under 100% holdbacks?

On the other hand, ExpressJet's stock is still trading at the non-negligible level of $3 a share, which gives it a market cap of over $150 million. And it's actually up substantially over the past month. After all, it's clearly a takeover candidate, and there's got to be a chance that shareholders will receive something, even if it does declare bankruptcy.