Reports of progress ease growing pains at ExpressJet

 - June 1, 2007, 11:41 AM

In the wake of a first quarter that saw his airline’s operating margins cut by more than half from a year earlier, ExpressJet CEO Jim Ream didn’t see much point last month in revealing traffic figures for the company’s new branded operation. But in case anyone held out hope that things went better than expected, Ream didn’t just let the omission speak for itself. “The markets are thin,” he said. “That’s why there wasn’t service there to begin with, and certainly the loads and what we’ve seen so far reflect that fact.”

Expecting to introduce the last of the 24 new cities to the new “spider-web” network of 55 market pairs by June 12, ExpressJet hasn’t escaped the growing pains most expected would accompany a venture of such magnitude. Technical problems surrounding Express- Jet’s ticket distribution plan didn’t help matters, and neither has a sector-wide pilot attrition crisis that has forced Ream to consider carrying extra check airmen on the payroll.

Still, Ream expressed satisfaction with the progress the operation has made since it launched on April 2, largely, he said, “because the product we said we could deliver to the market we have been able to deliver.” Ream also reported progress on the marketing campaign related to the new independent operation but conceded, “we have a fair amount of work to do in that area, and that’s going to be sort of a year-long process, in getting the service we have in the market known.”

Ream also said that the early reservations system snafus, ranging in nature from, in his words, quality control to connectivity issues, appear to have passed. At press time only the Amadeus system hadn’t come on line, something Ream said would happen in a matter of “a couple of weeks.”

A more serious challenge remained the shortage of check airmen, however. “Given the attrition patterns I’m seeing so far in the second quarter, I suspect we’re going to have similar pressures on us for the second quarter, maybe the first part of the third quarter before we’re ultimately able to arrest that issue,” said Ream.

By the time ExpressJet adds the last of the 24 cities slated to enter the independent system, most of the 32 Embraer ERJ 145s scheduled to come out of the Continental Express system in the second quarter will have already moved into the branded network. By the end of the month all but three of the airplanes scheduled to leave the Continental system will have gone, leaving ExpressJet with 205 airplanes flying under the Continental code. Ream characterized the cost of the transition as “fairly consistent with what we thought,” or slightly more than a five-point profit margin penalty. He said that all of the $11 million in capital spent during the first quarter involved costs related to the transition.

Meanwhile, Ream hopes to settle an arbitration case with Continental Airlines “by mid-July” or face the prospect of another quarter in which ExpressJet must book its financials using 2006 rates while incurring 2007 costs. The sides have scheduled a hearing for June 25 to 29.

Regardless of the outcome of the arbitration,the clause in the contract that restricts ExpressJet to flying 10 airplanes under capacity purchase agreements for competing major airlines appears unlikely to change any time soon. Perhaps for that reason more than any other, Ream and company have begun shopping for old-style pro-rate deals. In early March ExpressJet announced it had signed a capacity purchase agreement with Delta covering 10 of the 50-seat jets based at Salt Lake City and LAX; last month’s disclosure signals an expansion of the relationship to include an at-risk agreement involving eight Los Angeles-based ERJ 145s, bringing the total number of airplanes dedicated to Delta Connection service to 18.

“We’re still in the process of working through the definitive agreements on how exactly all that’s going to work, but we’ve got a rough concept fleshed out with them and agreed to,” said Ream. “It’s similar to the structure you saw in the late ’90s…We’re excited about that; we think it’s something that will hit on what we can do well as a company. I think we’ll bring value to the Delta network, and we’re looking forward to expanding that relationship.”

Meanwhile, the capacity purchase agreement will see ExpressJet begin Delta Connection service on June 7 from Los Angeles to McAllen, Texas, and Tijuana and Zacatecas, Mexico. Newly loaded Delta schedules also show ExpressJet service starting July 1 to nine more cities from LAX, namely Denver, Phoenix, Sacramento, San Francisco, Oakland and San Jose, Calif., Spokane, Vancouver and Boise, Idaho.