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Continental to sell stake
July 9, 2001: 4:04 p.m. ET

Airline plans Continental Express IPO, to file with SEC later this week
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NEW YORK (CNNfn) - Continental Airlines, the nation's No. 5 air carrier, confirmed Monday that it is looking to sell a stake in its feeder airline unit, Continental Express.

ExpressJet Holdings Inc., which operates as Continental Express, will file a registration statement later this week with the Securities and Exchange Commission for an IPO of Class A shares, the company said in a statement. ExpressJet will use the proceeds to repay a portion of the amount it owes to Continental Airlines.

The offering is seen as a way to boost Continental's sagging share price due to the current downturn in business travel, according to a published report.

The feeder airline business generally has been more profitable and faster growing than mainline operations at the nation's major airlines in recent years, as less-expensive, small regional jets have allowed airlines to open up new markets and feed more passengers into its mainline operations.

The use of regional jets by feeder airlines, such as this Continental Express jet, is the fastest growing segment of the U.S. aviation industry.
The plan to sell a minority stake in the unit was reported in Monday's Wall Street Journal.

Shares of Continental (CAL: up $0.49 to $49.25, Research, Estimates) gained in morning trading Monday.

Continental Express added 25 routes and 34 new regional jets in 2000, bringing it to a fleet of 117 regional jets, along with 63 turboprops. It also has placed an order for new longer-range jets with Brazilian aircraft maker Embraer, and now has 275 of the regional jets on order.

It averages 1,000 daily departures to 110 cities, and handled 7.8 million customers last year.

Even with their smaller size, the regional jets are much less expensive to operate per passenger mile due to lower labor and fuel costs and the cheaper price of the aircraft.

Spinning off a portion of Continental Express would be good for investors, said Michael Linenberg, airline analyst with Merrill Lynch. He points out that one independent regional jet operator, SkyWest Inc. (SKYW: up $1.11 to $28.11, Research, Estimates), has a market value for its stock of $1.5 billion, while Continental's overall market capitalization is only $2.5 billion, even though Continental Express alone has 60 percent more revenue and more regional jets than SkyWest.

"It appears that the market is ascribing little, if any, value to that unit in Continental's share price," said Linenberg in a note to clients Monday. "We view this possible development as being very favorable to Continental's shareholders, and therefore, are reiterating our accumulate rating on the stock."

While Continental was one of only two major airlines to earn a profit in the first quarter and is likely to be among the few to be in the black again in the second quarter, its profit and shares have been hit by current industry conditions. A sharp drop in top-paying business travelers is resulting in lower fares and profits across the industry.

Analysts surveyed by earnings tracker First Call forecast Houston-based Continental will earn 58 cents a share in the second quarter, down from $2.46 a share in the same period a year earlier.

Continental Express, however, has some restrictions on it that other regional carriers do not. Continental's contract with its pilots prohibits Continental Express from flying regional jets that can carry 70 or more passengers, according to the Journal. The Continental Express jets hold 37 to 50 passengers, and the carrier also flies propeller planes that carry 12 to 46 passengers. Some competitors have regional jets holding close to 100 passengers.

If the company sold a majority of Continental Express, it would open the door for its use of larger regional jets, but the Journal reports that a person familiar with the airline's plans does not see using the sale as a way around the current pilots contract, and that it does not plan to have an independent Continental Express use the larger regional jets.

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Feeder airline profits are likely to start seeing some squeeze as labor costs there rise, though. Pilots in particular are less willing to accept significantly lower wages than mainline pilots, especially if they see slower growth at major carriers meaning fewer opportunities to move up to the top paying jobs at the larger airlines.

No. 3 Delta Air Lines (DAL: up $0.28 to $44.45, Research, Estimates) just suffered a three-month strike by pilots at its Comair Inc. feeder airline unit, which flew about half the flights under the Delta Connection name. The unit was forced to shed numerous aircraft during the strike and now only serves about a quarter of the cities it did before the strike.

Delta agreed to an industry-leading labor pact there to settle the strike. Most of the industry's feeder aircraft pilots are unionized, and all the major employee groups at Continental Express have union representation. graphic


Pilots, Delta unit Comair reach deal - June 14, 2001

Delta feeder airline struck by pilots - Mar. 26, 2001

Delta acquires rest of Comair for $1.8 billion - Oct. 18, 1999


Continental Airlines

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