ExpressJet the latest regional squeezed by major partner

 - September 25, 2006, 2:26 PM

ExpressJet began shopping in earnest for a new mainline partner last month as Continental Airlines prepared to ask for bids from other regional airlines to fly roughly a quarter of the Continental Express network. Continental formally notified ExpressJet that it planned to withdraw 69 of the 274 Embraer regional jets from their capacity purchase agreement after the sides failed to reach terms on a new service contract. ExpressJet now serves as Continental’s only regional jet operator, and Continental remains ExpressJet’s only mainline code-share partner.

In a statement, Continental said it would request proposals from “numerous” regional jet operators to replace the withdrawn capacity. It plans to start the transition in January next year and finish by the end of the summer. “We didn’t want to take this action, but we were not able to reach an agreement with ExpressJet to lower our cost,” said Continental senior vice president of corporate development Mark Erwin. “Continental will continue to take the difficult actions necessary to remain competitive and protect the jobs and retirement security of our 42,000 employees.”

ExpressJet can continue to sublease from Continental any of the 69 withdrawn aircraft, although at “significantly” higher lease rates. However, ExpressJet cannot operate any aircraft into Continental’s hubs except those flown under its agreement with Continental. ExpressJet has another eight months to decide whether it will continue to sublease any of the withdrawn aircraft.

Mesa Air Group CEO Jonathan Ornstein has said he will bid on the business, and securities analysts expect SkyWest and Republic Airways will follow suit. Northwest Airlink partners Pinnacle and Mesaba Airlines appear likely candidates as well, given Northwest’s recent moves to shed capacity from their agreements and start a new regional airline of its own to fly 70- to 100-seat jets.

Of course, there remains a strong possibility that if ExpressJet fails to find a better deal elsewhere, it will accede to Continental’s demands. Now flying 274 airplanes for Continental, ExpressJet would face a serious problem if Continental chose to sever ties completely. In fact, the sides continue to negotiate a reduction to this year’s rates, retroactive to January 1.