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Pazartesi, 22 Temmuz 2024

Why is SkyWest Buying ExpressJet?


SkyWest (SKYW) announced last week that it’s buying ExpressJet  (XJET) for $133 million and merge the airline into its Atlantic  Southeast subsidiary.  The consolidation in this industry marches on,  but why does SkyWest want to do this? Why would anyone want to buy an  airline flying hundreds 50-seat regional jets when there are already too  many in the system?  If the branded airlines don’t want 50 seaters,  then why does SkyWest?


ExpressJet, the sole operator of Continental Express, has been looking for its place in the world for a long time.  I’ve written about it many times before, but after being spun off by Continental years ago, ExpressJet has unsuccessfully tried several models.  First there was the branded operation flying point to point  on smaller routes.  I loved the idea but the 50-seaters being used  combined with sky high oil prices led to its demise.  The airline also  tried to grow a big charter operation, but that has only shrunk.


Its latest play had been to diversify its flying outside of the  Continental system.  After finally getting a contract with United,  Continental had to go and announce a merger, thereby bringing all the  ExpressJet flying back into the family.  The visionary behind many of  these moves, Jim Ream, left for greener pastures at American while ExpressJet continued to lose money.  Now, SkyWest is buying it up.


This isn’t the first time SkyWest has looked at ExpressJet.  Back in 2008, SkyWest made an offer for the airline for $3.50 a share.   That didn’t go through, and today, SkyWest is paying $6.75 a share.   Shareholders of ExpressJet should be very happy to have pulled that in.


So why does SkyWest want to do this?  We know that SkyWest is  actively looking at consolidation in the regional world and purchased  Atlantic Southeast a few years ago from Delta.  Now, ExpressJet will be  merged with Atlantic Southeast, an obvious move since both are heavily  unionized while SkyWest itself is not.  This should get some costs out  of the already costly ExpressJet operation.


By buying ExpressJet, SkyWest gets a brand new contract with  Continental, something that will eventually be part of the new United.   The contract keeps all 206 of ExpressJet’s 50 seat Embraer 145 jets that  currently operate for the airline.  The last 36 of ExpressJet’s  airplanes are either under contract with United or flying in the  corporate aviation charter business.  It’s no secret that this industry  has far more 50 seat jets than it would like, so why would SkyWest  voluntarily pick up more than 200 more of them from ExpressJet, which  operates nothing else?


I have to imagine that there’s some added security for SkyWest with  this new agreement.  Nobody wants more 50 seat flying, so maybe by  offering a more competitive contract with Continental, it can at least  keep more of its fleet flying.  And maybe it will put the airline on the  fast track for more 70 and 90 seat flying down the road.  There had to  be some sort of guarantee from Continental that made it worth it to pick  up the additional 200 plus airplanes.


More importantly, why would Continental (and eventually United) want  this.  It’s not like there’s much of an opportunity to get rid of 50  seaters flown by other operators.  Except for around 20 airplanes flown  by Trans States, all the 50 seat jet flying for United and Continental  is now controlled by SkyWest.  And Continental can’t reduce the number  of planes flown by ExpressJet without consequence.  See, Continental  actually owns those planes and leases them to ExpressJet.  So, if  ExpressJet isn’t flying them, Continental is on the hook.


So all we can do is speculate about what else is happening behind the  scenes.  Did SkyWest offer to give better rates on 70 or 90 seat flying  in exchange for this longer term contract for 50 seaters?    That would  give stability to SkyWest and better rates to Continental for larger  flying.  But that would also get Continental in trouble.  Regionals  don’t have the right to fly any jet larger than 50 seats for  Continental, so if a deal was made assuming that the rules would change  post-merger, the Continental pilots will be angry.


Does SkyWest have someone who wants to take some of these airplanes  off its hands?  SkyWest has been trying to get AirTran to grow and it  also has an investment in a Brazilian regional carrier.  Could those be  places to send off more?

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