REBECCA RAYKO / FLORIDA
Regional share flotation is aimed at improving parent airline's standing on Wall Street
Continental Airlines has confirmed that it intends to go ahead with plans to sell off its Continental Express regional airline unit.
The move was originally revealed in March when Continental Airlines chief executive Gordon Bethune said he planned to wait for more favourable market conditions before floating Continental Express shares. However, Continental management have now confirmed their intent for an initial public offering of shares on 1 September.
Continental stands to generate at least $320 million from the sale of an undisclosed number of shares, according to documents filed with the US Securities and Exchange Commission. ExpressJet Holdings, which operates as Continental Express, is expected to use a slice of the proceeds to pay off the $552 million it owes to the parent company.
Continental plans to divest itself of the remaining shares of Continental Express six months after the initial public offering, according to the filing. It also plans to buy back 100% of the current flying capacity of the new company, as well as that of the 99 aircraft on firm order for the next two years.
Although Continental Express has slipped into financial trouble in the last couple of quarters, overall it is highly profitable. Analysts insist the value of the regional to the parent company transcends what is reflected on Continental Express's recent balance sheet, which showed a loss of $29 million in the first quarter of 2001.
"The fundamental role of any regional airline is to benefit the parent airline by feeding traffic to it. Continental Express' contribution to mainline Continental goes far beyond its standalone financials," says Doug Abbey of AvStat Associates in Washington DC.
Continental Express, with 96 regional jets and 70 turboprops, generated $820m for Continental Airlines in 2000.
Other analysts believe the market value of Continental Express unit has been inadequately reflected in Continental's recent share price. Mike Linenberg of Merrill Lynch says that SkyWest Airlines, with only 23 regional jets, 90 turboprops, and $530 million of annual revenue has a market value of $1.5 billion. All of Continental Airlines, with $10 billion of revenue, 380 jet aircraft, and the assets of Continental Express, has an equity market value of only $2.5 billion, says Linenberg.
As Continental Express is some 60% larger than SkyWest, it appears that the market is ascribing little, if any, value to that unit in Continental Airline's share price, Linenberg says.
Continental's shedding of its regional subsidiary fuels speculation that other US majors will follow suit, although George Hamlin of Global Aviation Associates sees the trend as heading in the other direction. "The Continental Express spin-off is more about Continental getting cash and enhancing the value of its stock," he says.
"Airline stocks are in the doldrums right now, but Wall Street believes that the regional airlines are the industry success story," Abbey says.
Source: Flight International
