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Article by DailyStocks_admin    (02-28-08 07:29 AM)

Hayman Advisors plans to nominate Andrew Jent and William Loftus as directors for election to ExpressJet's board at the 2008 annual meeting, which is scheduled for May 22. Hayman also said it has been in talks with ExpressJet about the company's business, its relationship with Continental Airlines (CAL), and developments in the airline industry. Hayman currently holds 3,732,085 shares (6.8%).

Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Our Company

Holdings was incorporated in Delaware in August 1996. We have strategic investments in the air transportation industry. Our principal asset is all of the issued and outstanding shares of stock of XJT Holdings, Inc., the sole stockholder of Airlines. Airlines is one of the largest regional airlines in the world, based on 2006 available seat miles, number of regional jets and passengers transported.

Airlines currently operates a fleet of 274 aircraft. During substantially all of 2006, the entire fleet operated on behalf of Continental as Continental Express pursuant to the Continental CPA and we received substantially all of our revenue under that agreement. In December 2006, Continental began releasing 69 aircraft (25% of our fleet) from that agreement. We redeployed two of these aircraft to charter service in 2006; the other 67 are being removed from Continental service during the first six months of 2007 and will be deployed in branded flying, charter service, or a capacity purchase agreement with a major network carrier. Branded flying, under the name “ExpressJet” will provide regularly scheduled air service to West, Midwest and Southeast destinations in the United States commencing service on April 2, 2007. We will continue to operate the remaining 205 aircraft under the Continental CPA.

As of December 31, 2006 under the Continental CPA, we averaged over 1,300 daily departures, offering scheduled passenger service to over 150 destinations in North America, Mexico and the Caribbean. Our available seat miles grew at a compounded annual rate of 18.8% from 4.7 billion in 2000 to 13.2 billion in 2006. We generated $1.7 billion of revenue and $92.6 million of net income for the year ended December 31, 2006. Please refer to our consolidated financial statements included in this report for information regarding our revenue and net income for each of the last three fiscal years and total assets as of the end of the last two years.

During 2005, we announced that our wholly owned subsidiary, ExpressJet Services, LLC (“ExpressJet Services”), and Airlines’ Training Services division received third-party repair and training certificates, respectively, from the Federal Aviation Administration (“FAA”). We expanded ExpressJet Services during 2006 to include our wholly owned subsidiaries American Composites LLC and InTech Aerospace Services, and Saltillo Jet Center, a majority owned subsidiary. Please see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary” and Item 8. “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1 – Summary of Accounting Policies” for a description of our investments and our current accounting treatment for these entities.

After Continental’s ownership of our common stock fell below 10% in April 2005, we redeemed the sole share of our Special Voting Preferred Stock, which was held by Continental. The redemption terminated Continental’s right to elect a director to our board of directors. The Continental CPA provided Continental the right to nominate a director to our board, but Continental relinquished this right in October 2005. In January 2007, Continental sold all but 625 shares of our common stock.

Business Strategy

We seek to enhance stockholder value by providing consistently efficient, customer focused and reliable regional jet service. This service, coupled with opportunities arising from the competitive strengths we have developed, positions us as a leading provider of regional jet services. We believe that our focus on cost, customers and reliability has both strengthened Continental and will create opportunities for our growth in other areas.

Our commitment to customer service and reliability has served us well doing business as Continental Express, and our Empresa Brasileira de Aeronautica S.A. (“Embraer”) ERJ-145XR aircraft enable Continental to serve more distant markets with demand for non-stop service to major metropolitan areas such as Houston, New York/Newark, Los Angeles and Cleveland.

Our cost structure, measured on a per-seat mile basis, remains highly competitive to aircraft of much larger configurations. Comparisons from publicly available data indicate that our direct operating costs on a per available seat mile basis for maintenance, flight operations, market fuel rates and aircraft ownership reflect economics better than many 100+ seat aircraft operated by major airlines. We believe that the capability and operating economics of our aircraft will provide us strategic opportunities in the foreseeable future. Airlines currently operates a fleet of 274 aircraft. During substantially all of 2006, the entire fleet operated on behalf of Continental, as Continental Express, pursuant to the Continental CPA and we received substantially all of our revenue under that agreement. In December 2006, Continental began releasing 69 aircraft from that agreement. We will continue to operate the remaining 205 aircraft under the Continental CPA.

During 2006, we finalized our plans for the 69 aircraft being released from the Continental CPA beginning December 28, 2006. The new Corporate Aviation division is expected to operate a total of 15 aircraft by June 2007, providing distinctive travel solutions for corporations, aircraft brokers, hospitality companies, sports teams, schools and others. The aircraft are being flown under Airlines’ operating certificate issued by the FAA. The aircraft are configured with 50 redesigned seats for enhanced passenger comfort, and each seat includes XM Satellite radio with over 100 channels of audio entertainment. In addition to the basic service, customized flight service options will give customers an opportunity to create a unique flight experience.

We currently plan to use 44 aircraft to launch branded services in markets that are sized appropriately for these aircraft and typically do not have direct flight options today. Service to 24 cities in the West, Midwest and Southeast United States is scheduled to begin in April and May 2007. Product features will include redesigned seats for enhanced passenger comfort, free XM Satellite radio, advanced seat assignments with no middle seats, valet carry-on baggage service and complimentary snacks and meals on longer haul flights.

Capacity Purchase and Other Agreements with Continental Airlines

General. We currently derive substantially all of our revenue from the Continental CPA. Under this agreement, Airlines operates flights on behalf of Continental as Continental Express. Continental controls and is responsible for scheduling, pricing and managing seat inventories and is entitled to all revenue associated with the operation of the aircraft. We also have various other agreements with Continental that govern our relationship.

On December 28, 2005, Continental notified us that it would withdraw 69 aircraft from the capacity purchase agreement between December 2006 and June 2007. We subsequently decided to retain all 69 aircraft. As of February 21, 2007, we have transitioned 21 aircraft from Continental. Additionally, on February 22, 2007, we agreed with Continental to defer the transition date for three ERJ-145XR aircraft from the first half of June to August 28, 2007. Until then, these aircraft will remain as covered aircraft under the terms of the Continental CPA.

Payment. Under the Continental CPA, Airlines is entitled to payment for each block hour that Continental schedules it to fly. Payment is based on a formula designed to provide Airlines with a target operating margin of 10% before taking into account variations in certain costs and expenses that are generally within our control. The agreement provides that the original cost components used in this formula remained in place until December 31, 2004, after which, new rates began to be established annually using the same methodology. We have exposure for most labor costs and some maintenance and general administrative expenses if the actual costs are higher than those reflected in Airlines’ estimated block hour rates.

2001-2004 . A quarterly reconciliation payment was to be made by Continental to Airlines, or by Airlines to Continental, if the operating margin calculated, as described below (the "prevailing margin") was not between 8.5% and 11.5% in any fiscal quarter. When the prevailing margin exceeded 11.5%, Airlines paid Continental an amount sufficient to reduce the margin to 11.5%. If the prevailing margin was less than 8.5%, Continental would have paid Airlines an amount sufficient to raise the margin to 8.5%. Certain items were excluded from the calculation of the prevailing margin, including:

In addition, to the extent that Airlines’ rate of controllable cancellations (such as those due to maintenance or crew availability) was lower than its historical benchmarks, Airlines was entitled to incentive payments; conversely, Airlines would have had to pay Continental if its controllable cancellations were above historical benchmarks. Because these incentive benchmarks were based on historical five-year rolling averages of monthly controllable cancellations, lower controllable cancellations that resulted in higher incentive payments in the near term reduced Airlines’ opportunity to earn incentive payments in the future. Also, because Airlines used monthly rolling averages, its opportunity to earn these payments in any particular fiscal quarter was affected by monthly variations in historical controllable cancellation rates. Airlines was also entitled to receive a small per-passenger fee and incentive payments for certain on-time departure and baggage handling performance.

2005 Rate Negotiation and Amendment. As part of the 2005 rate negotiation, we agreed to cap Airlines’ prevailing margin at 10.0%. Airlines also began including previously unreconciled costs, as discussed previously, within the margin band, although it is not reimbursed if these costs are higher and cause its prevailing margin to fall below the 8.5% margin floor. In addition, Airlines is still entitled to receive incentive payments from Continental if its rate of controllable cancellations is lower than its historical benchmark, but is not required to pay Continental a penalty for controllable cancellations unless the rate rises above 0.5%. Airlines continues to receive a small per-passenger fee and incentive payments for certain on-time departure and baggage handling performance.

The table below describes how variations between Airlines’ actual costs and estimated costs, as determined in the block hour rates, have been treated under the Continental CPA since January 1, 2005.

In 2006, the fully reconciled costs and costs within the margin band under the Continental CPA represented approximately 63% and 35% of total operating costs, respectively. In 2005, the fully reconciled costs and costs within the margin band under the Continental CPA represented approximately 64% and 36% of total operating costs, respectively.

Certain costs that were unreconciled under the Continental CPA prior to 2005 now require Airlines to make a reconciliation payment to Continental if the differences cause the prevailing margin to be greater than 10.0%. However, if the differences cause the prevailing margin to be less than 8.5%, they remain unreconciled. These costs are:




•


wages and salaries; and


•


benefits not included in the table above.

2006 Rate Setting. Pursuant to the terms of the Continental CPA, the 2006 scheduled block hour rates were finalized in April 2006 to be consistent with the 2005 rates.

2007 Rate Setting. We began 2007 rate discussions with Continental in September 2006. Although the Continental CPA contemplates a November 1 deadline for setting the rates, the parties agreed to extend the deadline. However, in January, ExpressJet and Continental were unable to agree on new rates for 2007 and agreed to submit their disagreements to binding arbitration in accordance with the terms of the agreement.

In the arbitration, each party has selected one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel. The Continental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision by late in the second or early in the third quarter of 2007. ExpressJet will continue to be paid under the 2006 block hour rates during the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2007.

Scope of Agreement and Exclusive Arrangement. At December 31, 2006, the Continental CPA covered 272 of Airlines’ existing fleet of 274 aircraft. By June 30, 2007, 205 of Airlines’ aircraft will be covered by the agreement. The agreement allowed us to be Continental’s exclusive regional jet service provider at Newark’s Liberty International, Houston’s Bush Intercontinental and Cleveland’s Hopkins International airports through December 31, 2006.

CEO BACKGROUND

Mr. Ream has been Chief Executive Officer since July 2001 and has been President and a director since October 1999. He joined Continental Airlines in 1994 as Vice President—Finance, responsible for accounting, financial planning and analysis. Mr. Ream was President and Chief Operating Officer from 1996 to 1998 of Continental Micronesia, Inc. and Senior Vice President—Asia for Continental Airlines from 1998 to 1999. Prior to joining Continental, he held various positions within the finance department of American Airlines, Inc.

Mr. Cromer has been Vice President and Chief Financial Officer since July 1997. He was Staff Vice President—Fleet Planning for Continental Airlines for two years before joining ExpressJet. Prior to joining Continental Airlines, Mr. Cromer held various finance and fleet planning positions within Northwest Airlines.

Mr. Peterson has been Vice President, General Counsel and Secretary since October 2003. Prior to joining our company, he was employed by Continental Airlines as Managing Attorney—Corporate and Assistant Secretary from 1995 to 2003.

COMPENSATION

(1) Represents the dollar amount recognized for financial statement reporting purposes in 2006 computed in accordance with FAS 123R. Includes amounts realized for grants awarded in prior years; Messrs. Ream, Cromer and Peterson did not receive any stock in 2006. For these purposes, we have assumed that none of the shares will be forfeited.


(2) Represents the dollar amount recognized for financial statement reporting purposes in 2006 computed in accordance with FAS 123R. Includes amounts realized for grants awarded in prior years; Messrs. Ream and Losness did not receive any options in 2006. For valuation purposes, we use the Black-Scholes option pricing model. In connection therewith, we have assumed (a) a risk-free interest rate of 4.9% based on the U.S. Treasury yield curve in effect for the expected term of the option at the grant date; (b) a dividend yield of zero since we have not historically paid dividends on our common stock and have no current intention to do so; (c) expected market price volatility of 50.5% based on the historical volatility of our stock since our initial public offering in April 2002; and (d) an expected option life of seven years based on our historical exercise patterns. (For these purposes, we have assumed that none of the shares will be forfeited.)


(3) Represents amounts earned under the company’s Management Bonus Plan and Long Term Incentive Plan as detailed below in the “Grants of Plan-Based Awards” table.


Represents amounts allocated to the officers’ accounts in our Supplemental Retirement Plan, which is described below under the heading of the same name, including deemed interest on these allocations.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Summary

Review of 2006

ExpressJet Holdings, Inc. (“Holdings”) has strategic investments in the air transportation industry. Our principal asset is all of the issued and outstanding shares of stock of XJT Holdings, Inc., the sole stockholder of ExpressJet Airlines, Inc. (“Airlines”), which currently operates as Continental Express (Holdings and Airlines are together referred to as “ExpressJet,” “we,” “us” and “our”). Airlines is one of the largest regional airlines in the world, based on available seat miles, the number of regional jets in its fleet and the number of passengers flown. We also invest in other entities that permit us to leverage the management experience, efficiencies and economies of scale present in our subsidiaries.

Airlines currently operates a fleet of 274 aircraft. During substantially all of 2006, the entire fleet operated on behalf of Continental as Continental Express pursuant to the Continental CPA, and we received substantially all of our revenue under that agreement. In December 2006, Continental began releasing 69 aircraft (25% of our fleet) from that agreement. We redeployed two of these aircraft to charter service in 2006; the other 67 are being removed from Continental service during the first six months of 2007 and are being deployed in branded flying, charter service, or a CPA arrangement with a major network carrier. Branded flying, under the name “ExpressJet” will provide regularly scheduled air service to West, Midwest and Southeast destinations in the United States commencing service on April 2, 2007. We will continue to operate the remaining 205 aircraft under the Continental CPA.

As of December 31, 2006 under the Continental CPA, we averaged over 1,300 daily departures, offering scheduled passenger service to over 150 destinations in North America, Mexico and the Caribbean. Our available seat miles have grown at a compounded annual rate of 18.8% from 4.7 billion in 2000 to 13.2 billion in 2006. We generated $1.7 billion of revenue and $92.6 million of net income for the year ended December 31, 2006. Please refer to our consolidated financial statements included in this report for information regarding our revenue and net income for each of the last three fiscal years and total assets as of the end of the last two years.

Fleet . During 2006, we accepted 8 new ERJ-145XR aircraft. With these deliveries, we ended 2006 with 104 ERJ-145XR, 140 ERJ-145 and 30 ERJ-135 aircraft. Our ERJ-145XR aircraft provide distinct advantages that enable us to pursue other strategic opportunities for the aircraft being released from the Continental CPA. The primary advantage is the aircraft’s 1,600 mile range, which enables it to reach thinner, long-haul markets that cannot be served, nonstop, with traditional 50-seat regional aircraft.

Labor. As of December 31, 2006, approximately 70% of our employees were covered by collective bargaining agreements. The contracts with the pilots, dispatchers, flight attendants and mechanics will become amendable in December 2010, July 2009, August 2010 and August 2009, respectively.

Information Technology . During 2006, we began the implementation of our own information technology infrastructure to eliminate our dependence on Continental for information technology systems and services. Related projects will deliver a separate physical network with voice over IP, data centers, application platforms and software systems. Major software implementations include human resource information systems, cash management, treasury, accounting, procurement, data warehousing, and other common back-office applications. We expect the first phases of these projects to be completed during the first half of 2007.

Business Ventures. Our consistent earnings under the Continental CPA and improving balance sheet have helped position us for new opportunities. We continue to seek strategic opportunities that leverage our internal strengths, such as our technical, training and fleet and asset management capabilities, to develop and implement additional business strategies. We made the following cash investments in 2006 (see Item 8. “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1 – Summary of Significant Accounting Policies – (i)” for the accounting treatment of each of the investments):

In January 2006, we purchased a non-controlling interest in Flight Services & Systems, Inc. (“FSS”) for $4.0 million. FSS is based in Cleveland, Ohio and provides airport services to airlines, airports and regulatory authorities.

On August 31, 2006, we purchased the remaining 51% of American Composites, LLC, an aviation maintenance business in Miami, Florida, for $0.8 million in cash. The results of operations were consolidated in our financial statements as of September 1, 2006.

During the second quarter of 2006, w e invested $0.8 million for a 50% interest in Saltillo Jet Center, S. de R.L. de C.V. an aircraft paint facility located in Saltillo, Mexico. We received a $0.8 million note receivable from the other 50% interest owner secured by their ownership interest. The company has not obtained additional financing outside of the equity holders. Pursuant to the partnership agreement and bylaws, we had the right to receive 100% of the residual returns from the company’s earnings until this note was fully satisfied. We also invested $9.2 million for the construction of the hangar and office facilities from which the company conducts its operations. During December 2006, Saltillo Jet Center restructured its equity ownership interest and we now own 80%. In connection with the restructuring, we forgave the $0.8 million note receivable from the other owner.

InTech Aerospace Services, LP, American Composites and ExpressJet Services, LLC, are doing business under the name ExpressJet Services. Under this name, these entities operate or co-invest in maintenance facilities located across the United States in Miami, Shreveport, Knoxville and Houston as well as in Saltillo, Mexico. ExpressJet Services will provide third-party maintenance for interior and exterior work on the aircraft.

Liquidity and Financing Activities. As of December 31, 2006, we had $302.9 million in cash and short term investments, including $11.2 million in restricted cash. During 2006, we paid off the remaining balance on our note payable to Continental of $17.5 million and reduced our loan agreement with Export Development Canada (“EDC”) by $0.9 million. In addition, we made $0.8 million in principal payments related to our capital leases. Our cash flows from operations were sufficient to cover our capital resources and liquidity requirements during the three years ending December 31, 2006. See discussion below in “– Liquidity and Capital Commitments.”

Outlook for 2007

We will continue seeking to enhance stockholder value by providing enhanced product offerings and what we believe to be the most cost-efficient and reliable regional jet service for our customers, including seeking to achieve the highest level of customer satisfaction in the regional industry. In the long-run, we believe this strategy will serve us well, although we continue to be affected by the pressures affecting the airline industry generally.

Continental CPA. Beginning on December 28, 2006 and ending June 2007, 69 aircraft are being released from the Continental CPA. After the release of the aircraft, we will continue to fly 205 aircraft or 75% of our total fleet under the Continental CPA. However, on February 22, 2007 we agreed with Continental to defer the transition date for three ERJ-145XR aircraft from the first half of June to August 28, 2007. Until then, these aircraft will remain as covered aircraft under the terms of the Continental CPA.

We began 2007 rate discussions with Continental last September. Although the Continental CPA contemplates a November 1 deadline for setting the rates, the parties agreed to extend the deadline. However, in January, ExpressJet and Continental were unable to agree on new rates for 2007 and agreed to submit their disagreements to binding arbitration in accordance with the terms of the agreement.

In the arbitration, each party has selected one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel. The Continental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision by late in the second or early in the third quarter of 2007. ExpressJet will continue to be paid under the 2006 block hour rates during the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2007.

Branded Flying. Our branded flying will focus on providing nonstop service to cities that are underserved by other carriers. Beginning in the second quarter of 2007, we plan to initialize service to 24 cities located in the West, Midwest and Southeast United States that are typically less congested than other major cities. We plan to fly over 200 daily departures to eliminate connections and minimize delays and total trip time. California’s LA/Ontario International Airport will be the busiest city for us, followed by San Diego, California; Austin, Texas; Sacramento, California; and San Antonio, Texas.

We offer a distinct product to meet the needs of both business and leisure travelers. Our customers will fly on young jets with advanced seat assignments and no middle seats. We will also provide valet carry-on baggage service as a convenience in order to save time the customers would otherwise spend loading bags in the overhead bin or waiting at baggage claim. Our leather seats have been redesigned for additional passenger comfort including memory foam cushions and over a 100 channels of complimentary XM Satellite radio. We will serve complimentary, recognized brand-name snacks, and full meal options will be available for longer haul flights.

We will provide electronic ticketing, or E-Tickets, which will eliminate the need to print and process a paper ticket. E-Tickets enhance customer and revenue information and are a vital part of our distribution strategy. We will have self-service kiosks at all airports throughout our system to expedite the check-in process for our customers.

We will offer a range of competitive fares that are distinguished by restrictions on use, such as time of day and day of the week, length of stay and minimum advance booking period. Service fees will be consistent with or less than those charged by most United States carriers.

ExpressJet is in the process of launching a new frequent flyer program called JetSet. It will be a simple fly-and-redeem travel program for members with the possible future addition of other cash-value rewards and partner participation.

Corporate Aviation. Our new Corporate Aviation division is expected to operate a total of 15 aircraft by June 2007, providing distinctive travel solutions for corporations, aircraft brokers, hospitality companies, sports teams, schools and others. The aircraft are being flown under Airlines’ operating certificate issued by the FAA. The aircraft are configured with 50 redesigned seats for enhanced passenger comfort, and each seat includes complimentary XM Satellite radio with over 100 channels of audio entertainment. In addition to the basic service, customized flight service options give customers an opportunity to create a unique flight experience.

Other CPA Arrangements. During the 4 th quarter 2006, we signed a memorandum of understanding with a major U.S. carrier to operate 10 ERJ-145XR aircraft in its network under a capacity purchase agreement. We intend to complete negotiations on this contract during first quarter 2007 with operations for this new customer beginning in the second quarter 2007.

Although we believe that these new operations will enhance stockholder value in the long term, significant start-up costs will be incurred during our transition period, which is likely to significantly reduce our overall profitability for 2007. In addition, we may experience volatility in our quarterly results as these operations begin.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

2007 Outlook

Operational Review

This year marks a year of significant transition for us, as we have diversified our flying portfolio within our fleet of 274 aircraft. Airlines currently offers scheduled airline services with approximately 1,550 daily departures to 175 cities in the United States, Mexico, Canada and the Caribbean. For the three and nine months ended September 30, 2007, Airlines operated under the Continental CPA at a 99.9% and 99.8% controllable completion factor, respectively, which excludes cancellations due to weather and air traffic control. System-wide, Airlines achieved overall completion factors of 98.0% and 97.5%, respectively, for the same periods. Our current plan for aircraft allocation as of September 30, 2007 follows:

Contract Flying

Continental CPA. Our relationship with Continental remains important to our success as 75% of our fleet is engaged in support of Continental’s network, operating as Continental Express. We believe the service we provide Continental has been effective in helping Continental to fully develop its route network and gain recognition as a premier service provider. We provide Continental seamless service to more than 150 markets in the U.S., Mexico, Canada and the Caribbean. We believe our operations will continue to meet all of Continental’s reliability measurements, and we expect our results of operations to generate steady cash flow.

Delta CPA. Airlines currently operates 10 aircraft as Delta Connection pursuant to the Delta CPA, which began June 1, 2007. The agreement has a two-year term and is subject to two one-year extensions at Delta’s option. Delta is responsible for scheduling, marketing, pricing and revenue management on the aircraft and collects all passenger revenue. Airlines operates, maintains and finances the aircraft.

Airlines receives a base rate for each completed block hour and departure and is reimbursed for certain pass-through costs, such as fuel expenses and certain airport costs. During the quarter ended September 30, 2007, Airlines earned incentive payments for exceeding completion and on-time benchmarks, except for August, in which only the completion benchmark was met. Additionally, on a semi-annual basis, Airlines has the ability to earn additional incentive payments by maintaining a high completion factor and high Department of Transportation rankings for on-time arrivals and customer satisfaction. We anticipate that we will meet these incentives at the upcoming measurement date. We expect our results of operations under the Delta CPA to generate steady cash flow.

Corporate Aviation. Our Corporate Aviation (charter) division currently operates nine aircraft, providing distinctive travel solutions for corporations, aircraft brokers, hospitality companies, sports teams, schools and others, including short-term flying solutions for other carriers, such as JetBlue Airways during March and April 2007 and Frontier Airlines starting in November 2007. As with our branded aircraft, our charter aircraft are configured with 50 redesigned seats for enhanced passenger comfort, and each seat includes complimentary XM Satellite radio with over 100 channels of audio entertainment. Customized flight service options give customers an opportunity to create a unique flight experience. Based on recent trends, we anticipate that Contract Flying will be most consistent during the period from October through April. For the summer months, we experience more ad-hoc charter flying.

Branded Flying

Our Own Brand . As of September 30, 2007, we provided scheduled air service to 24 cities in the United States with over 220 daily departures, utilizing 42 of our aircraft, under the Branded Flying segment. Customers can access our reservation system through our consumer website, www.xjet.com, reservations call center and all four major global distribution systems. Being a part of the global computer reservation systems allows travel agents and online distributors, such as Expedia, Orbitz, Travelocity and Cheaptickets.com the visibility to see and sell our tickets. We launched sales in the Worldspan global distribution system in February 2007, in the Sabre and Amadeus global distribution systems in April 2007, and the Galileo global distribution system in July 2007. Recently, we announced that we will provide service to Long Beach Airport, Santa Barbara International Airport and the Greater Reno-Tahoe International Airport beginning in November 2007, connecting these growing cities to important destinations that do not currently have non-stop service. Additionally, we will update our Fall schedule to better align service with consumer demand and add non-stop destinations to Spokane, Washington, Tucson, Arizona, and Omaha, Nebraska.

Delta Pro-Rate . On July 1, 2007, Airlines began scheduled air service with eight aircraft under a pro-rate revenue sharing arrangement with Delta. Under this arrangement, we are responsible for scheduling, marketing, pricing, revenue management, as well as the operation and maintenance of the aircraft, and earn a pro-rated portion of the fare plus an incentive for passengers connecting onto Delta's network. We expect to transition three additional aircraft for a total of 11 aircraft under this arrangement effective December 17, 2007.

Aviation Services

During the first half of 2007, we rebranded our Aviation Services segment, which includes American Composites, InTech and Saltillo Jet Center as ExpressJet Services, which provides third-party maintenance for interior and exterior work on aircraft. We also provide third-party ground-handling services to Continental and other airlines at locations across the United States.

Financial Review

Results of Operations . For the three and nine months ended September 30, 2007, we reported consolidated operating losses of $36.7 million and $65.0 million, respectively. Although we believe that our expanded operations will enhance stockholder value in the long term, we have incurred significant transition costs, such as aircraft modifications, paint and initial training, which will significantly reduce our overall profitability for 2007 and result in a loss for the year. In addition, Branded Flying is likely to produce more volatile financial results than our Contract Flying, primarily due to changes in the price of fuel, fluctuations in passenger demand and fare levels. Our Branded Flying is also impacted by the cyclical nature of the airline industry to a greater degree than our Contract Flying.

Shared Expenses . A significant portion of our operating expenses and infrastructure (e.g., maintenance, non-airport facility rentals, outside services and general and administrative expenses) support our entire fleet of 274 aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operations. Additionally, since we transitioned all of our 69 aircraft released from the Continental CPA during the first nine months of 2007, we incurred approximately $12.9 million in transition expenses associated with painting, maintenance modifications and training to ready our operation for flying outside of the Continental CPA. These costs were not included in our measurement of segment profitability as they are expected to be nonrecurring. We believe that the presentation of our consolidated shared costs and transition costs is more reasonable than allocating these expenses in a manner not reviewed by our chief operating decision makers.

Liquidity. As of September 30, 2007, we had $253.8 million in cash and cash equivalents, including $15.3 million in restricted cash, which is used as collateral for our workers’ compensation coverage, letters of credit and charter deposits. Our cash flow from operating activities decreased approximately $94.7 million for the first nine months of 2007 compared to the same period in 2006. The decrease is due mainly to cash used in diversifying our flying portfolio. Although our cash flows from operations were not sufficient to cover our capital resource and liquidity requirements during the first nine months of 2007, we believe our current liquidity to be sufficient to fund our current operations and other financial obligations through 2008 as we will continue to earn a steady cash flow from Contract Flying.

Labor. As of September 30, 2007, approximately 70% of our employees were covered by collective bargaining agreements. The contracts with our pilots, dispatchers, flight attendants and mechanics will become amendable in December 2010, July 2009, August 2010 and August 2009, respectively. Similar to our competitors in the airline industry, we are experiencing hiring and training challenges of our pilots to meet our operational demands. As a result, our operating expenses in such areas have increased as described in more detail below.

Critical Accounting Policies and Estimates

The following are additions to our critical accounting policies and estimates included in our 2006 10-K.

Revenue Recognition. We recognize our operating revenue under contractual arrangements, such as the Continental CPA, as described in our 2006 10-K, pursuant to the terms of the contract. Operating revenues from these contracts have been reclassified as passenger revenue. Additionally, we recognize our unrelated passenger revenue and ground handling and other revenues as services are provided. For Branded Flying, tickets are sold and processed internally, with amounts due settled on a monthly basis through an airline clearing house, as appropriate, or pursuant to the terms of our agreements with various credit card service vendors. We recognize passenger revenue when transportation is provided or when a ticket expires unused, rather than when a ticket is sold. Nonrefundable tickets expire on the date of intended flight, unless the date is extended by notification from the customer in advance of the intended flight. The amount of passenger ticket sales not yet recognized as revenue is included in our consolidated balance sheets as air traffic liability.

Transportation taxes. Various taxes and fees assessed on the sale of tickets to traveling customers are collected by Airlines as agent and are remitted to taxing authorities. These taxes and fees are recorded as a liability until remitted to the appropriate taxing authority.

RESULTS OF OPERATIONS

The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three and nine months ended September 30, 2007, compared to the corresponding periods ended September 30, 2006.

Comparison of Three Months Ended September 30, 2007 to Three Months Ended September 30, 2006

Operating Revenue and Margin

Our total operating revenue increased 3.0% compared to the same period in 2006. Over 80% of our operating revenue was attributable to our Contract Flying under the Continental and Delta CPAs. Operating revenue from our Branded Flying and Aviation Services contributed to the remaining consolidated operating revenue.

As a result of our arbitration with Continental over our 2007 block hour rates, we adjusted the amounts we are charging Continental in 2007. The arbitration panel determined that the annual 2007 budgeted rates originally presented by Airlines should be reduced in the aggregate by $14.2 million, which includes the 10% target operating margin. Therefore, our total operating revenue for 2007 will be $14.2 million lower than our planned operating revenue from our originally proposed rates.

We began flying under our own brand on April 2, 2007. Although passenger revenue from such flying was less than 14% of our total operating revenue for third quarter 2007, we believe that our passenger revenue will continue to grow as the communities we serve become more aware of our brand and the services we provide. In addition, our tickets only recently became available for sale by all travel agencies since we experienced longer than anticipated implementation timelines with the global reservation systems.

Our third quarter of 2007 reflected an 8.3% operating loss, as compared with an operating profit of 8.1% for the third quarter of 2006. We expect to incur a loss for the full year, due to the commencement of our flying outside of the Continental CPA, transitioning our aircraft, re-branding our company and diversifying our customer base.

Operating Expenses

Certain of our operating expenses (e.g., training, maintenance, corporate rent and general and administrative expenses) and infrastructure support our entire fleet of 274 aircraft. A significant portion of our costs pertain to the consolidated operation and not to individual reportable segments. Our shared costs for the three and nine months ended September 30, 2007 were approximately $83.8 million and $246.6 million, respectively. Additionally, since we transitioned substantially all of our 69 aircraft released from the Continental CPA during the first nine months of 2007, we incurred approximately $12.9 million in non-recurring transition expenses associated with the painting, maintenance modifications and training to ready our operation for flying outside of the Continental CPA.

For the three months ended September 30, 2007, wages, salaries and related costs increased by $14.1 million, or 14.3%, compared with the same period in 2006. The increase represents growth in our work force to support changes in our flight operations and increases in wage rates under some of Airlines’ collective bargaining agreements. In conjunction with the increases in base wages, we incurred approximately $2.4 million higher employee benefit costs, such as medical coverage, workers’ compensation costs and 401(k) expenses. In addition, we are continuing to experience anincrease in overtime pay for our pilots as a result of our training backlog in the early part of this year. We expect the overtime payments to decrease and normalize for the remainder of the year.

During the third quarter of 2007, the final three of 69 aircraft transitioned out of the Continental CPA. Fuel expense increased $38.9 million or 65.0%, from the same period in 2006 mainly to support diversification of our flight operations into Branded Flying, corporate aviation and regional service for Delta. Gallons consumed under contract agreements with Continental and Delta represented approximately 78% of our fuel consumption during the quarter. Gallons where we have exposure to market fluctuations represented approximately 21% of our fuel consumption during the quarter at an average cost, including related fuel taxes of $2.40 per gallon.

The decrease of $2.1 million in outside services during the three months ended September 30, 2007 compared to the same period in 2006 relates mainly to a reduction in estimated legal fees associated with the Continental arbitration offset slightly by expenses incurred to diversify our operations. Legal fees associated with the Continental arbitration were not reimbursed under the Continental CPA.

During the third quarter of 2007, Marketing and Distribution cost increased $8.2 million when compared to the same period in 2006. This increase is a result of the infrastructure needed to support and promote our diversification into other lines of business including advertising and promotion, loyalty programs, global distribution systems and reservation call centers.

For the three months ended September 30, 2007, other operating expenses increased by $16.3 million as compared to the same period in 2006. This increase related primarily to passenger services, distribution and catering related expenses incurred to support Branded Flying. Additionally, crew-related charges, such as per diem, hotel cost and relocation expenses because of our transition activities, increased as a result of higher rates and increased flight operations. Likewise, supplies expense related to our Aviation Services operations increased due to higher sales volume.

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