FIRST-QUARTER SURPRISES

From United, the surprise is positive initial results from its differentiated-product strategy. From US Airways comes a first-quarter profit, however small. And from ExpressJet the biggest surprise--a decision to find places and ways to operate 69 regional jets rather than turn them back to Continental Airlines.

United Airlines, which emerged Feb. 1 from three years in Chapter 11 bankruptcy protection, turned in a $171-million operating loss for the March quarter, a "solid" performance in line with its court-approved reorganization plan, according to CEO Glenn Tilton. CFO Jake Brace says he is "dissatisfied" so far with cost controls, which are supposed to deliver $300 million to the bottom line this year and $400 million in 2007. But unit revenue from mainline flying was up 11% over the first quarter of 2005, and Tilton believes the company has "just begun" to benefit from its strategy of extracting extra money for premiums in all classes of service.

US AIRWAYS CEO Doug Parker, who used to run America West Airlines and stayed at the helm as the two carriers merged, says he is "extremely pleased" to be turning a profit in what is most airlines' weakest quarter of the year. Net earnings totaled $65 million--just $5 million after extraordinary items--but it's a start. The carrier, which earlier expected a full-year profit, except for integration expenses, now thinks it will be in the black, period. The original US Airways accounted for $43 million of a combined $125-million operating profit, largely on the strength of huge year-over-year increases in unit revenue--22.2% in mainline service, 36.7% in regional operations. The comparison reflects poor performance last year, when US Airways was in Chapter 11 and discounting fares deeply in an attempt to keep its customers.

As a fee-for-service provider to Continental, ExpressJet Airlines looks for a 10% return on sales, but wound up at 9.2% in the first quarter. More important is the carrier's response to a notification from Continental last December that it would withdraw 69 aircraft--44 Embraer 145XRs and 25 145LRs, all 50-seaters--from the capacity purchase agreement by which ExpressJet provides regional feed to Continental's hubs.

The 25% fleet withdrawal, permitted by the agreement, followed attempts by Continental to get better terms from ExpressJet. "[We] did everything we thought we could," ExpressJet CEO Jim Ream told securities analysts May 10. But the regional carrier couldn't accommodate a key objective of Continental's, he added: returning control of all 270 RJs to the mainline carrier. The aircraft are on lease to Continental, and ExpressJet subleases them.

Under the agreement, ExpressJet had until September to decide whether to return the aircraft to Continental or keep them. If it kept them, the lease payments would increase and ExpressJet wouldn't be allowed to operate them at Continental hubs. Also, if ExpressJet operated more than 10 of the aircraft for another major airline, Continental would be entitled to equally favorable contract terms.

If ExpressJet had turned back the aircraft--so that Continental would be able to keep them in Continental Express service through its newly chosen second affiliate, Chautauqua Airlines--it would have faced additional provisions of the capacity agreement that permit Continental to withdraw 25% of the remaining 201 aircraft in 2009, or to terminate the agreement at any time on one year's notice. ExpressJet concluded the aircraft return would put the company on a path toward gradual liquidation.

If Continental pursues its objective to control its regional aircraft, Ream said, the question will be whether there are "folks in our sector [regional aviation] that decide that they just want to be a service-based company that shows up with some crews and some line maintenance functions, and then in five years rebid . . . with somebody else who would show up with new crews and a new maintenance program. It's very difficult to build a sustainable business there, because you're always going to be undercut by the next new guy coming in."

THE 69 RJS WILL transition out of the Continental-ExpressJet capacity purchase agreement between December 2006 and June 2007, so ExpressJet will have the rest of the year to find new ways to use them. Ream said the company is exploring four types of service: providing regional feed for another network airline, setting up an offshore network, flying corporate or charter service and operating point-to-point between small communities. Ream said the ExpressJet board decided there was enough progress on all fronts to let employees and the investment community know that the company will keep the aircraft.