Continental will withdraw 25% of E-jet
Jan. 04, 2006
Continental Airlines said Dec. 28 it will withdraw 69 of 274 Embraer RJs from its capacity purchase agreement with ExpressJet Airlines because the latter's rates "are above the current market."ExpressJet may continue to sublease any of the 69 aircraft at higher rates but cannot operate them into any of CO's hubs. The ERJ-135s and dash 145s operate in the Continental Express network. ExpressJet at one time was a wholly owned subsidiary of CO but now is publicly traded.
Continental intends to request proposals from other RJ operators with a transition expected to begin in January 2007 and be completed that summer.
In a statement, ExpressJet said it still is negotiating rates for 2006. Continental has agreed to continue paying it at December 2005 rates until an agreement is reached. Any agreement to revise the current rate structure will be retroactive to Jan. 1, 2006.
CO's move highlights the vulnerability of US Regional airlines as their Major partners seek to lower their own costs. Over the past 10-15 years, most US Regionals have surrendered an independent market identity as well as their own internal marketing, advertising, sales, pricing and distribution functions to their partners. More recently, the larger airlines began ordering aircraft on behalf of their Regional partners.
Following 9/11, many Regionals remained highly profitable owing to the fixed-fee-per-departure contracts negotiated in better days. Such agreements typically transferred much of the operating risk from the smaller carrier while providing a guaranteed rate of return. As Majors retreated from markets, the Regionals accelerated expansion plans, bulked up on 50-seat RJs and took over the flying. But what the Majors give they also can take away, as Northwest recently did to Mesaba and Continental now is doing to ExpressJet.
For the nine months ended Sept. 30, ExpressJet had net income of $89.1 million on sales of $1.1 billion.