Clocks
Well-Known Member
There's obviously a ton of information on the report. I think I cut out the most important things (which is still a long read)
Here is the entire thing:
http://www.sec.gov/Archives/edgar/data/1144331/000114433108000019/xjt10k123107final.htm#item7
My ignorant analysis basically sees no "positive" news from any of this information. It seems to mostly be "here is how we think expressjet can survive 2008, but a lot of it is out of our control"
Nothing new that I can see however, except the disclosure that the Delta prorate has not been profitable, and isn't expected to be profitable for 2008. Thats leaves the only profitable portions of XJT being the two CPAs and the charter ops.
Here is the entire thing:
http://www.sec.gov/Archives/edgar/data/1144331/000114433108000019/xjt10k123107final.htm#item7
My ignorant analysis basically sees no "positive" news from any of this information. It seems to mostly be "here is how we think expressjet can survive 2008, but a lot of it is out of our control"
Nothing new that I can see however, except the disclosure that the Delta prorate has not been profitable, and isn't expected to be profitable for 2008. Thats leaves the only profitable portions of XJT being the two CPAs and the charter ops.
Contract Flying
Continental
Our relationship with Continental remains crucial to our success since 75% of our fleet continues to support Continental’s network. We believe the service we provide Continental has been effective in helping Continental to fully develop its route network and gain recognition as a premier service provider. We provide Continental seamless service to approximately 150 markets in the U.S., Mexico, Canada and the Caribbean. We believe our operations will continue to meet all of Continental’s reliability measurements, and we expect our results of operations to generate steady operating income, as long as the current Continental CPA remains unchanged.
The Continental CPA is scheduled to expire on December 31, 2010. At its sole election, Continental can extend the term of our agreement for up to four additional five-year terms through December 31, 2030 upon written notice delivered at least 24 months prior to the expiration of the initial term. Continental’s first option to extend must be delivered to us by December 31, 2008. In addition, Continental can cancel the Continental CPA at any time, upon providing 12-months notice. At this time, we have no indication whether Continental will elect to cancel or extend the agreement; consequently, we will continue to evaluate the alternatives provided to us within the provisions of the Continental CPA.
We began 2008 rate discussions with Continental last September. The Continental CPA contemplates a November 1 deadline for setting the rates; however, the parties agreed to extend the deadline. Although we believed that we were nearing completion of the rate setting process, Continental advised us on February 28, that if we were unable to reach agreement by March 14, they might initiate arbitration proceedings again in accordance with the provisions of the Continental CPA. We can also initiate arbitration if we think it necessary. As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not be necessary. Continental also advised us that it believes that it overpaid Airlines by $6 million in 2007 and $2.1 million in 2006. We believe that if we were required to arbitrate these matters we would prevail. However, we may not be successful in resolving these disputes without reducing our 2008 income. We cannot currently predict the timing or the resolution of these matters. Although we are hopeful that we can agree on rates and resolve Continental’s other claims without arbitration, there can be no assurance that we will be successful in doing so.
If we are required to arbitrate, each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel. The Continental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision by late in the second or early in the third quarter of 2008. ExpressJet will continue to be paid under the 2007 block hour rates during the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.
Delta
Airlines currently operates 10 aircraft as Delta Connection pursuant to the Delta CPA, which began June 1, 2007. The agreement has a two-year term and is subject to two one-year extensions at Delta’s option. Delta is responsible for scheduling, marketing, pricing and revenue management on the aircraft and collects all passenger revenue. Airlines operates, maintains and finances the aircraft.
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Under the Delta CPA, Airlines receives a base rate for each completed block hour and departure and is reimbursed for certain pass-through costs, such as fuel expenses and certain airport costs. Airlines has the ability to earn monthly and semi-annual incentive payments for exceeding completion and on-time benchmarks (referred to as monthly incentives) and a high completion factor, high Department of Transportation (“DOT”) rankings for on-time arrivals and customer satisfaction (referred to as semi-annual incentives). For the year ended December 31, 2007, we met all of our monthly incentive metrics with the exception of the on-time benchmark in August and November. Of the three semi-annual incentive metrics for on-time, customer service, and completion, we met only two of these metrics in 2007. We anticipate that we will continue to meet a majority of these incentives at the measurement dates, and we expect our results of operation under the Delta CPA to generate steady operating income for the term of this agreement.
Corporate Aviation
Our Corporate Aviation (charter) division currently operates nine aircraft, providing distinctive travel solutions for corporations, aircraft brokers, hospitality companies, sports teams, schools and others, including short-term flying solutions for other carriers, such as JetBlue Airways (“JetBlue”) during March and April 2007 and Frontier Airlines (“Frontier”) during November and December 2007. As with our branded aircraft, our charter aircraft are configured with 50 redesigned seats for enhanced passenger comfort, and each seat includes complimentary XM Satellite Radio with over 100 channels of audio entertainment. Customized flight service options give customers an opportunity to create a unique flight experience. Based on recent trends, we anticipate that contractual flying will be most consistent during the period from October through April. For the summer months, we experience more ad-hoc charter flying. We continue to seek longer-term contracts instead of those lasting from one-to-six months that we currently have in place and to generate steady operating income from these operations.
Branded Flying
ExpressJet Brand
We provide scheduled air service to 25 cities in the United States with approximately 200 daily departures, utilizing 39 of our aircraft, under our Branded Flying operation. Customers can access our reservation system through our consumer website, www.xjet.com, reservations call center and all four major global distribution systems. Being a part of the global computer reservation systems allows travel agents and online distributors, such as Expedia, Orbitz, Travelocity and Cheaptickets.com the visibility to see and sell our tickets.
Delta Prorate
On July 1, 2007, Airlines began scheduled air service with eight aircraft under the Delta Prorate. At this time, we are responsible under this arrangement for scheduling, pricing, revenue management, as well as the operation and maintenance of the aircraft, and earn a prorated portion of the fare plus an incentive for passengers connecting onto Delta's network. In December 2007, we transitioned three additional aircraft from our ExpressJet brand flying for a total of 11 aircraft under this arrangement. As Airlines is party to both the Delta CPA and the Delta Prorate, our relationship with Delta is important as we continue to establish our network of corporate customers.
We have not yet been profitable in our Branded Flying operation and do not anticipate that we will be profitable in 2008 as we continue to establish our ExpressJet brand. We continue to evaluate and modify our schedules, promotions and marketing programs to establish our brand and shift our traffic mix from heavily leisure to more business/corporate travel and minimize our exposure during seasonal peaks and valleys. We continue to enhance our infrastructure to facilitate timely information and permit us to make better tactical decisions and mitigate our losses in underperforming markets.
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Aviation Services
Aviation Services includes our ground-handling services pursuant to our contracts with Continental and other airlines at airport locations across the United States, as well as Services, our wholly owned repair and overhaul subsidiary. During the first half of 2007, we rebranded American Composites, InTech and Saltillo, under the Services name, which provides third-party maintenance for interior and exterior work on aircraft. We will continue to leverage our operation expertise developed from this business segment to cost-effectively operate our 274 aircraft for our current customers and attract potential customers.
Our 2008 Outlook
General
Many factors could materially affect our results of operations; 2008 will be a challenging year for us. Among the most significant factors outside our control are economic conditions, possible industry consolidation and, to some extent, fuel costs within our Branded Flying segment.
Many economists believe the U.S. economy is in a recession. The airline industry is highly cyclical, and the growth in demand for air travel is correlated to the growth in the U.S. and global economies. An economic recession could have an adverse effect on our results of operations and financial condition.
Recent media reports have indicated that various U.S. legacy carriers are considering consolidation. As a regional service provider for legacy carriers, our preference is to continue in long-term capacity arrangements, but the outcome of industry consolidations could adversely affect our competitive position.
In 2008, our focus is primarily on factors within our control, including:
Our relationship with Continental remains crucial to our success since 75% of our fleet continues to support Continental’s network. We began 2008 rate discussions with Continental last September, with no resolution. Continental advised us on February 28, that if we were unable to reach agreement by March 14, they may initiate arbitration proceedings again in accordance with the provisions of the Continental CPA. We would also be able to initiate arbitration after March 14 if we thought it necessary. As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not be necessary. The Continental CPA sets forth procedures and a schedule that would likely result in a hearing and the issuance of a final decision by late second or early third quarter of 2008 if we were required to arbitrate. ExpressJet would continue to be paid under the 2007 block hour rates during the arbitration and would expect the decision setting revised rates to be retroactive to January 1, 2008. The outcome of our 2008 rate setting process is uncertain and may adversely impact our results and cash flows from operations if we are unable to negotiate reasonable terms with Continental.
• working with Continental to set the appropriate rates pursuant to the Continental CPA
• discussing changes to the Continental CPA to enhance our long-term working relationship;
• developing our relationship with Delta as we continue to expand both contract and prorate flying;
• negotiating additional longer-term contracts for our corporate charters;
• adjusting our Branded Flying as necessary to respond to external cost factors, such as fuel, economic downturns and distribution costs; and
• controlling our internal costs, such as crew and outside services costs
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We expect our Branded Flying to incur a significant loss for the full year 2008 as we commence its second year of flying in April 2008 and continue to establish our brand, refine our reservations and marketing, adjust our schedule appropriately, seek to increase our market share (or stimulate demand) and manage our yields. However, absent a combination of adverse factors outside of our control, such as a significant further deterioration of the U.S. economy, Continental’s inability to pay us pursuant to the terms of the existing capacity purchase agreement, further material increases in the cost of fuel, or industry consolidation, which could result in the formation of one or more airlines with greater financial resources than ours to compete more fiercely in the markets we operate, we believe that our Contract Flying will generate sufficient operating income to offset a significant portion of any loss, subject to the considerations set forth below.
As of December 31, 2007, we held $189 million in unrestricted cash and cash equivalents. In early 2008, we invested approximately $65 million in auction rate securities (“ARS”) which are primarily backed by student loans that are guaranteed by the U.S. government and have AAA long-term ratings from Moody’s and Standard & Poor’s. For a detailed list of our ARS, please see Exhibit 10.19. The securities are held at Citigroup Global Markets, Inc., Banc of America Securities, LLC and Royal Bank of Canada Capital Markets. While the contractual maturities of the underlying securities within these ARS fall in years maturing after 2015, each security has a reset period of either seven or 28 days. Beginning February 11, 2008, auctions for these securities were not successful, resulting in our continuing to hold them and the issuers paying interest at the maximum contractual rate. At this time, we have ceased purchasing additional ARS and have a standing sell order for our current ARS portfolio. However, continued unsuccessful auctions could result in our holding our current ARS beyond their next scheduled auction reset dates, thereby limiting their short-term liquidity. If liquidating these investments becomes necessary, we have received a level of commitment to borrow against some of our current ARS portfolio.
We have significant financial obligations due in 2008. We can satisfy the largest of these obligations, our convertible notes, with either cash, shares of our common stock, or a combination thereof. For risks associated with settling the obligation in common stock, please refer to Item 1A, “Risk Factors”. In addition, we are evaluating our options for meeting these obligations, including the possibility of a secured financing transaction permitting us to pay a substantial portion of the convertible notes in cash while maintaining a healthy cash balance and avoiding the dilution to equity that would result from a stock settlement of the convertible notes. However, as our options to satisfy the convertible notes, as described above, depend on several factors outside of our control, we are also continuing to evaluate additional steps within our control that we could take if our ability to meet our obligations were limited. These include, individually or in combination if required:
We believe that our existing liquidity, projected 2008 cash flows, including the incremental sources of liquidity described above, if needed, will be sufficient to fund current operations and our financial obligations through the year ending December 31, 2008. However, as noted above, factors outside our control may dictate that we alter our current plans and expectations.
• reducing capital expenditures to only those required by law or operational necessities;
• borrowing against or liquidating our ARS holdings, including at a discount if necessary;
• selling assets, tangible or intangible, or subleasing the aircraft we lease from Continental;
• transferring some or all of the aircraft currently dedicated to our ExpressJet brand flying to other operations, or grounding them entirely if circumstances so required.
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Contract Flying
Continental. Since 2005, Continental has proposed a number of amendments to the Continental CPA, which would have, among other things, significantly reduced the amount Continental pays us for the regional airline service we provide and would have dramatically reduced our rights to the aircraft. We negotiated with Continental to try to reach an agreeable compromise. Our board of directors, which typically meets five times a year, held 12 meetings in 2005, six of which were special meetings to consider Continental’s proposals and to formulate counterproposals. Based on their evaluations, including the analysis of independent financial advisers, the board determined that the rates proposed by Continental would not be in the best interest of our stockholders and declined Continental’s proposals. We made counterproposals that we believed addressed Continental’s concerns, but were fair to our stockholders as well. However, to date, we have not been able to reach a long-term agreement. Additionally, we were unable to agree on the 2007 rates and, in accordance with the terms of the Continental CPA, submitted our dispute to binding arbitration. The arbitration panel determined that the annual 2007 budgeted rates originally presented by Airlines should be reduced by only $14.2 million in the aggregate (or less than 1.0% of total Continental CPA operating revenue), which included the 10% target operating margin. We recorded our Continental CPA revenue based on the final rates determined by the arbitration panel.
Further, the Continental CPA is scheduled to expire on December 31, 2010. At its sole election, Continental can extend the term of our agreement for up to four additional five-year terms through December 31, 2030 upon written notice delivered at least 24 months prior to the expiration of the initial term. Continental’s first option to extend must be delivered to us by December 31, 2008. In addition, Continental can cancel the Continental CPA at any time, upon providing 12-months notice. At this time, we have no indication whether Continental will elect to cancel or extend the agreement; consequently, we will continue to evaluate the alternatives provided to us within the provisions of the Continental CPA.
We began 2008 rate discussions with Continental last September. The Continental CPA contemplates a November 1 deadline for setting the rates; however, the parties agreed to extend the deadline. Although we believed that we were nearing completion of the rate setting process, Continental advised us on February 28, that if we were unable to reach agreement by March 14, they might initiate arbitration proceedings again in accordance with the provisions of the Continental CPA. We can also initiate arbitration if we think it necessary. As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not be necessary. Continental also advised us that it believes that it overpaid Airlines by $6 million in 2007 and $2.1 million in 2006. We believe that if we were required to arbitrate these matters we would prevail. However, we may not be successful in resolving these disputes without reducing our 2008 income. We cannot currently predict the timing or the resolution of these matters. Although we are hopeful that we can agree on rates and resolve Continental’s other claims without arbitration, there can be no assurance that we will be successful in doing so.
If we are required to arbitrate, each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel. The Continental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision by late in the second or early in the third quarter of 2008. ExpressJet will continue to be paid under the 2007 block hour rates during the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.
Delta. Airlines currently operates 10 aircraft as Delta Connection pursuant to the Delta CPA, which began June 1, 2007. The agreement has a two-year term and is subject to two one-year extensions at Delta’s option. Delta is responsible for scheduling, marketing, pricing and revenue management on the aircraft and collects all passenger revenue. Airlines operates, maintains and finances the aircraft. Although we do not anticipate expanding our services to Delta under a capacity purchase agreement at this time, our focus is for Delta to automatically renew its extensions as available and to expand with us through our prorate flying or through other marketing alliances, such as sharing in frequent flyer programs.
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Corporate Aviation. Our goal for 2008 is to expand our Corporate Aviation (charter) division. We will continue to evaluate various corporate shuttle opportunities, including seasonal flying for other air carriers during high-demand periods to complement our current contracts. Our current contracts are the most consistent during the period from October through April, and generate steady operating income throughout the year. Additionally, we continue to seek longer-term contracts instead of those lasting from one to six months that we currently have in place to enhance consistency in aircraft and crew planning and to maximize our operational efficiency.
Branded Flying
ExpressJet Brand. We have not yet been profitable in our Branded Flying operation and do not anticipate that we will be profitable in 2008 as we continue to establish our ExpressJet brand. We continue to evaluate and modify our schedules, promotions and marketing programs to establish our brand and shift our traffic mix from heavily leisure to more business/corporate travel and minimize our exposure during seasonal peaks and valleys. We continue to enhance our infrastructure to facilitate timely information and permit us to make better tactical decisions and mitigate our losses in underperforming markets.
We believe that the flexibility of our business platforms will enable us to sustain our liquidity and meet our financial obligations through 2008. However, if sufficient losses occurred in the Branded Flying segment we could remove from service a portion or all of the aircraft employed in this segment in 2008. Our April 2008 schedule for ExpressJet Brand flying was adjusted in February 2008 in response to industry challenges and high fuel costs. In addition to eliminating routes with weak demand, we plan to decrease aircraft utilization from 11 hours per day to 9 hours per day. Total daily departures will decrease from 200 to 172 and overall capacity will be reduced approximately 11% from the capacity originally planned for 2008. We believe these changes will increase yields on the remaining capacity in the remaining markets such that it will exceed the impact of the planned capacity reductions.
Delta Prorate. We have not yet been profitable in this operation and do not anticipate that we will be profitable in 2008; however, Delta is very important to us as we continue to establish our network of corporate customers and as we hope to become profitable in the future. We currently operate 11 aircraft under the Delta Prorate. In 2008, we intend to expand our promotions and marketing programs for Delta Prorate flying in order to solidify Delta’s and our presence in Los Angeles, California and to potentially add services to markets that complement Delta’s network and enhance our future operating income.
Fuel Costs. High fuel prices continue to increase our costs and diminish profitability. Our results of operations for Branded Flying have been impacted by record high fuel prices, similar to the rest of the airline industry, and we have implemented a strategy using fixed forward price contracts for fuel to reduce the volatility of changing fuel prices over a rolling 12-month period on a quarterly basis. Fixed-price arrangements consist of an agreement to purchase defined quantities of aviation fuel from a third party at a stated price. As of December 31, 2007, we had committed to purchase 15.1 million gallons, or 85% of our anticipated Branded Flying fuel needs for the first quarter of 2008, at a weighted average price per gallon of $2.40, excluding taxes and into-plane fees. Additionally, we have committed to purchase 11.9 million gallons for the second quarter of 2008, 9.0million gallons for the third quarter of 2008, and 6.0 million gallons for the fourth quarter of 2008. For the first quarter of 2009, we have contracted to purchase 3.0 million gallons. This represents approximately 70% and 22% of our anticipated Branded Flying fuel needs for 2008 and the first quarter of 2009, respectively. Although, our forecasted fuel needs outside of our CPA’s with Continental and Delta are covered under these fixed forward price contracts in 2008, a substantial increase in the price of jet fuel, to the extent our price contracts are impacted, or the lack of adequate fuel supplies in the future, could still have a material adverse effect on our Branded operation.
