Continental Airlines said on Wednesday it plans to take back 69 regional jets that ExpressJet had been operating for it after failing to win a cheaper contract.
Continental's move to withdraw a quarter of the 274 planes ExpressJet operates makes it the latest regional airline to come under pressure from larger partners trying to save money as they struggle with heavy losses.
Lucrative capacity purchase deals had long cushioned the regional carriers from the soaring fuel prices that pushed their larger partners deep into the red.
"If you as legacy carrier are losing billions of dollars and your partner is making hundreds of millions of dollars obviously there's a disconnect that needs to be addressed," said Jim Corridore, an equity analyst at Standard & Poor's.
Continental, which owns 8.6 percent of ExpressJet's common stock, said it would seek bids from other regional jet operators to operate the aircraft at more competitive rates.
"We didn't want to take this action, but we were not able to reach an agreement with ExpressJet to lower our cost," said Continental Senior Vice President of Asia/Pacific & Corporate Development Mark Erwin, in a statement.
ExpressJet spokeswoman Kristy Nicholas said the Houston-based carrier remains hopeful that Continental will not follow through on its plans to take back the planes, saying the larger airline planned to do research into competitors' rates.
"They felt like in order to do that research they needed to put out the announcement that they did today," she said. "Once they get that research and get the facts they're looking for, time will tell as to where we go."
She said ExpressJet could opt to operate the planes for another airline or to fly them itself.
Continental's move follows similar steps by rivals. Bankrupt Northwest Airlines earlier this month sought proposals from various airlines to provide connection services for less than one of its regional partners, Pinnacle Airlines.
Another Continental rival, Delta Air Lines, is also trying to cut its costs in bankruptcy.
"They're probably looking at what's happening with Northwest and Delta and probably realizing they have to get their contract cost structure down as well," said Ray Neidl, an analyst with Calyon Securities.
Houston-based ExpressJet said it had received notice of Continental's plan to withdraw the aircraft, adding that the two carriers are still negotiating a rate structure for 2006.
ExpressJet has up to nine months to decide whether it wants to sublease any of the 69 aircraft, on which it would pay higher rates, Continental said. ExpressJet would be barred from operating them in any Continental hub without the Houston-based carrier's permission.
There is little chance of ExpressJet finding another partner for the 69 planes, Corridore said, adding that the two companies could still reach an agreement but that it would be at sharply lower rates.
"Continental is obviously digging its toes in here and saying that your rates are going to come down or else you're not going to be our partner of choice any longer," he said.
Continental said it had provided ExpressJet with a schedule providing for the withdrawal of the first regional aircraft in December 2006 and the last in the second quarter of 2007, with a transition to a new operator expected to begin in January 2007.
