ExpressJet Holdings, Inc. Q2 2008 Earnings Call Transcript

August 26, 2008 | about: XJT

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ExpressJet Holdings, Inc. (XJT)

Q2 2008 Earnings Call

August 6, 2008 10:00 am ET

Executives

Kristy Nicholas – Investor Relations Contact

James Ream – President and Chief Executive Officer

Analysts

[Richard Olson - In Bridge Capital]

[Matthew Hart]

Presentation

Operator

Welcome to the ExpressJet second quarter 2008 financial results call. (Operator Instructions) I would now like to turn the call over to Kristy Nicholas.

Kristy Nicholas

On the call we have Jim Ream, President and Chief Executive Officer, and Phung Burns, Staff Vice President-Finance, Controller and Interim Chief Financial Officer.

Portions of this call may contain forward-looking statements not limited to historical facts, but reflecting our current beliefs, expectations and our 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 2007 10-K.

During this call certain non-GAAP certain 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 www.ExpressJet.com. Jim will cover the operating and financial results for the quarter and then he will take questions.

Now I'd like to introduce Jim Ream.

James Ream

Let me get the highlights and then open it up to questions.

We, as you saw in the press release closed the quarter, had a net loss of $31.7 million. The quarter includes some non-recurring charges related to some fleet decisions that we've made re: some analysis of the goodwill results that was on the books as the [inaudible] from Continental, all related to some subsequent business decisions we're going to talk about later on in the call.

If you normalize for these write-offs, our operating income loss would have been cut in half. We would have had about a $22 million improvement year-over-year on an operating level, and that includes another $10 million of fuel price impact in the second quarter of this year.

So we feel that we made substantial progress on the revenue side with all the businesses that we're involved with. Obviously the things that I want to talk about next involve the events that we've made decisions on make going into the second quarter particularly relevant. So we did want to close. But we did want to talk about the second quarter that we did end it with $191 million in cash. That includes the restricted cash and the impaired value of the auction rate securities.

Well first let me talk about the announcement we made in the last 60 days where we had reached a new agreement with Continental Airlines. The agreement is for seven years starting in July and we're just starting our second month under that new agreement.

The agreement has given some significant economic concessions to Continental Airlines in order to secure a long-term transaction. It's based on two facts. One, that they had the contractual flexibility to come in and reset the economics on this agreement. They made it pretty clear that the agreement was not workable the way it was today and that they were going to terminate if we were not able to reach some positive outcome.

So we worked pretty hard to try to get to the economic benchmark that they were shooting for. Our opinion is the economic benchmark is going to be a little bit geared towards more of a marginal bid. It may come from another operator that had already had their business in place.

So it's really going to be a stretch for us to be successful under the new agreement. We're going to have to have very much unit cost improvement in order for us to have some modest amount of income under the new CPA and I feel that we've got a reasonable shot of hitting that unit cost improvement, but as a result of that we're still going to earn probably a fair amount less than most of our peers in the industry on a per tail basis.

So they have the contractual flexibility but more importantly just as the industry has gotten far more challenging and with fuel prices in particular putting a lot of pressure on smaller aircraft, it really just reflects the economic value of the under lying airplane that we're using in serving Continental Airlines. It obviously doesn't make sense for them to lose hundreds of millions and then for us to make tens of millions with an airplane that's supporting that network and the one that's suffering the most from higher fuel prices.

I really feel that we've really got kind of a right value proposition now for Continental given where fuel is and an airplane that's of value to their network. And I think that's really mostly what's reflective in this new CPA. We're working with all of our suppliers and unions to sit down and make sure they understand what we need to do to hit the cost targets in order for us to be successful. Those discussions are going along very productively and I feel that we're making good progress and we hope to have that wrapped up here over the course of the next say 45 days to 60 days or so.

If we're not successful in those conversations, then I'm not sure we have a sustainable business. So it's pretty important that we get this done. They understand that and I think that's why those conversations are going along pretty well.

The challenge we have is that with the fleet decisions, and I'll talk about some of those, and with where the industry is generally and how all networks are pulling their capacity down, is that we're looking at a fair amount fewer ASM's in the fourth quarter than we're flying currently. So it's somewhere in the neighborhood of a 30% drop off in the capacity.

So above and beyond getting the unit cost improvement, we also need to get dollar-for-dollar of expense savings for all those ASM's. That's going to be pretty challenging given how quickly those ASM's are disappearing from us, and usually some of this takes a little bit of time to work your way through as you're committed on schedules, maintenance programs and so on to be able to react to this quickly.

I feel we're going to have obviously some pressure on us in the third quarter as we go through the fleet transition and then as we get to the fourth quarter we're still going to have to work pretty hard to try to get all those expense items identified given the drop off in the amount of ASM's that we're dealing with.

On the positive side we've cleared up how the MSN works. We've eliminated that out of the CPA, it gives us more flexibility to look at other opportunities that may present themselves. We've solved the corporate governance issues. We're cleaned up and very much more market rate than where they were previously.

Continental agreed to take aircraft back. Of the 69 that we're operating on our own and bear the cost of whatever the fleet disposition is that they decide upon with those aircraft, and for any airplanes that they retained, that they would reset the lease rates on those aircraft to very much represent the new market value of this aircraft, and I think gives us a fair amount of flexibility as we look at opportunities based on that.

Not surprisingly, the conversation going along with Delta have been very much the same. First it was going to be less expensive for them to park the aircraft that we had under the capacity buy agreement, than it was to operate and just pay us out on all the fixed amounts that we had in that contract. We sat down and worked out a transition plan with them on those 10 airplanes. And then the aircraft that we are working for them out of LAX, they're certainly long 50-seat airplanes, and felt that they had adequate resources to cover what their plans were for LAX and would no longer need us to support that part of the operation. We've put those two together and we're going to eliminate all of our flying with Delta on September 2.

With the option by Continental to return aircraft, it also changed the analysis on all of our branded operation. While we've made consistent progress quarter in and quarter out and we're pretty darn happy with the revenue performance looking at our first year anniversary going into this summer, obviously a lot of the progress we've made on the revenue side was just being consumed with an ever increasing fuel price. It put a lot of pressure on us.

Obviously as I mentioned fuel prices going up put a lot of pressure to follow the aircraft and so this aircraft was really struggling at where fuel prices currently are. Even though we just saw an accelerating awareness level, and a vastly improving loyalty program, great participation by the communities, we have made a decision that at this time it does not make sense for us to continue with the scheduled branded service and so we are going to terminate all those operations on September 2 as well.

It was a really painful decision because I think you know our folks did such a great job of creating a real positive, meaningful impact on the passengers that we had, and the communities really were responding. I think we're pretty comfortable with the market share we had gotten in the first year and we thought that we would continue to improve upon that, but again, where fuel is just made that decision impossible carry this operation forward so we will terminate that September 2 as well.

We are making really good progress on our corporate charter service business. The [inaudible] revenues in the second quarter grew over 3.5 times versus last year's second quarter. Looking at the third quarter, that growth rate will be even higher on a year-over-year basis.

While it was very operationally challenging to make this work the way customers need for it to work, sales cycles can be longer to get the more longer term agreements and to get those ultimately in place we've made so much progress here that we're going to continue to grow this business.

As I mentioned, we've got the new lease rate agreements with Continental. It really allows us a lot of flexibility to use these aircraft in more of a lower utilization environment than we had before and we've made so much progress that we're going to continue to grow this. Of the 69 airplanes, we're going to keep 30 under these new lower lease rates and put them in this unscheduled corporate and charter based business and continue to grow this as we can.

That leaves 205 airplanes working for Continental. They have the right to pull that down to 190 aircraft starting June of next year, and we're working with them on the schedule for this upcoming winter. But obviously, much less utilization on the aircraft that we're flying with them, just based on their re-sizing their own network, based on where they feel demand is going to be for the upcoming winter period.

So that's a quick overview of all the things that have happened. We can open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Richard Olson - In Bridge Capital].