ExpressJet Part II: Cashflows

I spoke to ExpressJet's (XJT) investor-relations chief Kristy Nicholas today, in the wake of my blog entry last week about the company. She helped clarify a couple of issues:

Firstly, the 100% holdback on credit-card income isn't nearly as damaging to ExpressJet as an increase to 50% was to Frontier (FRNTQ). ExpressJet says it's likely to have $18 million tied up in credit-card holdbacks on any given day in 2008; that's not chump change, but it's still only about 1% of the company's 2007 revenue of $1.7 billion. Most of ExpressJet's business is contract flying, mainly for Continental, and none of that business is affected by holdbacks.

Secondly, all of ExpressJet's auction-rate securities are backed by student loans, and they're all triple-A rated, for what that's worth. The company did take an $8.7 million charge against its portfolio of auction-rate securities, because when it asked some investment banks to bid on its portfolio, that was the number that came back. But so far ExpressJet has not realized any losses on its $65 million ARS portfolio, and Nicholas said that she's started to see "a little bit of traction in the last week or two," with some auctions starting to succeed again.

In the meantime, the student-loan-backed ARSs are paying very high rates of interest, on the order of 18-20%, in stark contrast to some municipal ARSs which have much lower maximum interest rates. As and when the auctions start clearing again, ExpressJet will of course sell (or not roll over) its holdings. But so long as the market remains locked up, the company is getting a healthy income on its unfortunately-illiquid investment.

None of this means that ExpressJet is out of the woods, by any means. My personal feeling is that the share price is being held up by takeover hopes more than anything else, and that the credit-card companies have good reason to be very worried about ExpressJet's counterparty risk. But give Nicholas points for imaginative spin, at least: "You hope to see your holdback percentage go up," she told me, "because that means you're selling more tickets." Nice try.

Comments

[Dira]

In hindsight, a pretty irresponsible piece.

[AviationInvestor]

I do not see what is irresponsible about the piece. If you would like to talk about ExpressJet management then I would agree.

No accountability to major shareholders. Embarking on disasterous branded operations and destruction of the relationship with Continental.

The management team needs to go and sell the operation to Skywest Group.

[PokerDonkey]

What does Kristy Nichlos have to say today about management destroying shareholder value? Ream and company are total morons. I'd lose less money if I stood out in my backyard throwing bricks of cash onto a bonfire. And he got paid $890k last year! Nice scam!

[porchmonkey]

This management team needs to get real. Our bread and butter "Continental"... is getting rid of us. Give us the real deal and stop yanking the employee group around.

[BBBuddy]

Porchmonkey your management team has been handed a tough situation by Continental, who, consequently, IS the party responsible for "destroying the relationship'. XJT has offered CAL the best deals in the industry on CPA flying and ground handling contracts but apparently CAL has a hair up their Pokerdonkey and is determined to see XJT fail. Anyone who knows the history of the relationship understands this. Remember, CAL spun XJT off in 2002, made some nice cash on the IPO and is completely responsible for the cost structure under which XJT operates. Not to mention that the CPA under which XJT operates severely restricts their ability to take advantage of opportunities for other flying. CAL is in the shadows doing their best to "destroy XJT shareholder value" all the while promising suitors, such as Skywest, some kind of "sweet" deal if they will just buy XJT. And why? Who knows? XJT is, argueably, the most operationally reliable regional carrier in the world. Just look at the metrics. Jet Blue, Frontier, Delta and United have all done business with XJT in the last year. Ask any one of them how XJT outperforms every regional they do business with.
Delta has 12 regional partners, including Skywest. Ask them who they'd rather do business with!

[PokerDonkey]

So it was CAL's idea to start branded service? hahahaha, very funny Buddy! A good management team wouldn't find themselves in that situation. If you think about it, the company would be worth more if they just shut down operations. Seriously, look at the balance sheet vs the price per share.

[JeremyElliott]

Darwin's coming to the airline industry, and XJT will be one of the few regionals left standing. The higher the oil goes, the better XJT's performance relative to competitors--just look at the relative operating ratios for Asset, Inventory, and Receivables. Profitability in '08 is still a possibility.

[AnonymouslyOminous]

A bunch of stories have surfaced these past few weeks. XJT lost 15 cities so far and more are on the way...it seems that Ream and Kellner have been having a peeing contest for the past couple years...and it's not in Ream's best interest to strong-arm a Legacy airline...especially when most of the eggs are in CAL's basket and employees livelyhoods are at stake in the closing cities and the nes being put up for bid in the coing months...with the articles and a few published investor letters calling Ream out on some misdeeds and mishandlings of the strained CAL relationship and the Branded side (respectivley) it's surprising no one has called for his resignation...if XJT is going to survive a struggling airline market, the powers that be need to cut the ego BS and get back to basics...who lost sight of the true goals?..They both did!...In response to BBBuddy, the only reason XJT has the reputaion it has, is the employee base and they alone, not Ream's business saave, not the corporate machine, none of it would have been possible without the frontliners dedication to the company, but as always they're the first ones to get shafted and shafted hard!...you can cry foul about whether or not CAL is "sabotaging" XTJ's future, but in my experience XJT's hands aren't without their share of bloodstains either...the frontline employees have done their share to make the airline run and gain an unmatched reputation for reliability...they deserve to be given a fair shot at keeping their jobs without personal ego issues clouding the decisions, or they need to be given timely ACCURATE information, without the propaganda leaflets to read and a few shots from Jim Jones' Juciteria