Two years after its first attempt to take over ExpressJet fizzled, US regional operator SkyWest has struck a key acquisition deal to bolster its position as the largest US regional carrier.

Once finalised, it will see SkyWest's fleet balloon from 452 aircraft to 696, making it the largest regional service provider to Continental, Delta and United. At the same time, Continental accounts for roughly 86% of ExpressJet's block hours.

SkyWest chief financial officer Brad Rich believes the planned United and Continental merger will only strengthen the deal, as SkyWest will become "the major provider of regional operations to the two largest airline networks in the world".

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On closing the deal, SkyWest will begin integrating ExpressJet into its Atlantic Southeast Airlines subsidiary, which it purchased from Delta in 2005. While some of ExpressJet's operations will stay in its current Houston headquarters during integration, the combined entity's base will be in Atlanta.

SkyWest is paying $133 million or $6.75 per share for ExpressJet, well above the $3.50 it proposed two years ago and 105% above ExpressJet's closing price the day before the deal was unveiled. Rich stresses SkyWest can do the deal "without putting any material stress on our balance sheet".

Analysts at Raymond James, when considering ExpressJet's net cash position, estimate "the acquisition enterprise value is roughly $83 million". In return, SkyWest should secure a combined network with 4,000 daily departures to 350 cities and an annual passengers of roughly 50 million.

SkyWest also struck a 10-year deal with ExpressJet covering the 206 Embraer jets currently operating as Continental Express that includes five years of current rate protection. Queried if this is just the same contract with ExpressJet's rate with the exception that SkyWest has the ability to cut costs to make it profitable, Rich states: "That is the deal."

But SkyWest also inherits a large number of undesirable 50-seat jets. Rich points out that Continental is either the owner or primary lessor of ExpressJet's aircraft, and lease terminations start in 2013 and run through 2020 and beyond. "As they naturally terminate, Continental has a right to pull-down the fleet," says Rich. But SkyWest has "certain replacement rights with respect to those aircraft to maintain a certain percentage of flying".

Source: Airline Business

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