XJT Expressjet Holdings Inc.

Form 10-K

Commission File Number 1-31300
EXPRESSJET HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

            Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes [X] No

            Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [  ] Yes [X] No

            Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or by such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

            Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K (§ 229,405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

            Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  [  ] Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X] Smaller reporting company

            Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    [  ] Yes [X] No

            The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $17.4 million as of June 30, 2009.

            As of February 26, 2010, 16,947,238 shares of common stock were outstanding.

            Information called for by Part III of Form 10-K is incorporated by reference to the Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the Commission within 120 days after December 31, 2009.

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Forward-Looking Statements

            This report contains forward-looking statements.  Statements in the "Business,” “Risk Factors,” "Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operation" sections of this report, together with other statements including words such as "believes," "intends," "plans," "anticipates, “estimates," "projects," "expects" or similar expressions represent forward-looking statements that are based on our expectations in light of facts known by management on the date this report was filed with the Securities and Exchange Commission (“SEC”).  Specifically, statements regarding our future results of operations, operating costs, business prospects, growth and capital expenditures, including plans with respect to our fleet, are forward-looking statements.  These statements reflect our plans and assumptions about future events and are subject to uncertainties, many of which are outside our control.  Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks.  The key areas of the known risks that could significantly impact our revenues, operating results and capacity include:

            For further discussions of these risks and other uncertainties, refer to Item 1A, Risk Factors of this Form 10-K.  The statements in this report are made as of March 1, 2010, and the events described in the forward-looking statements might not occur or might occur to a materially different extent than described in this report.  We undertake no duty to update or revise any of forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. Business

General

            ExpressJet Holdings, Inc. (“Holdings”), a Delaware corporation, was incorporated in August 1996 and is engaged in the business of transporting people.  Our principal asset is all of the issued and outstanding shares of stock of XJT Holdings, Inc., the sole stockholder of ExpressJet Airlines, Inc. (referred to in this report as “Airlines” and, together with XJT Holdings, Inc. and Holdings, as “ExpressJet”, “Company”, “we” or “us”).  Airlines currently operates a fleet of 244 aircraft flying under contractual arrangements for network carriers and entities desiring cost-effective and fully customizable group travel.  Airlines is one of the largest regional airlines in the world based on 2009 available seat miles, fleet size and passengers transported.

            In 2009, ExpressJet continued to transition its business by focusing on contractual flying arrangements.  In addition, we placed emphasis on improving our balance sheet in light of the pressures of industry-wide capacity reductions and continued difficulties in the global economy.  These efforts included the repurchase of $8.7 million of our 11.25% Convertible Secured Notes due 2023 in the open market, which reduced the outstanding principal balance of our convertible notes from $60.8 million as of December 31, 2008 to $52.1 million as of December 31, 2009.  We also repurchased 3.0 million shares of our common stock in 2009.  In late 2009, we began to reallocate aircraft within our fleet to immediately support existing capacity needs of United under the United Express Agreement.  Additionally, revenues increased over 40% in 2009 within our Corporate Aviation (charter) division.

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            For substantially all of 2009, we operated 214 aircraft for Continental as Continental Express under the Amended Continental CPA and 30 aircraft within our Corporate Aviation (charter) division.  In early 2010, we executed the United Express Agreement, which has a retroactive effective date of December 1, 2009, pursuant to which we will operate 22 ERJ-145 aircraft as United Express to replace flying performed by other United Express partner carriers whose contracts have expired.  We operated a total of six aircraft under the United Express Agreement as of December 31, 2009 and a total of 16 aircraft under the United Express Agreement as of February 15, 2010.  The remaining six aircraft will begin operating under the United Express Agreement on March 1, 2010.  On February 15, 2010, we entered into the First Amendment to the United Express Agreement with United, pursuant to which we will fly up to ten additional aircraft for United in the current ExpressJet livery from May 2010 through December 2010.  With the addition of this flying, we expect our 2010 fleet of 244 aircraft to be allocated as follows:

            We also provide aviation services through our two wholly owned subsidiaries, ExpressJet Services, LLC and InTech Aerospace Services, LP (“InTech”) and through our and majority owned subsidiary, Saltillo Jet Center, S. de R.L. C.V. (“Saltillo”).  These services include ground-handling at airport locations across the United States, aircraft composite repair and overhaul, and aircraft interior refurbishments (interiors and paint).  During the first half of 2007, we rebranded InTech and Saltillo so that each does business under the “ExpressJet Services” trade name.  These entities are collectively referred to herein as “ExpressJet Services”.

            We compete with a number of regional airlines for the service we provide to our main-line airline partners and charter customers.  We believe that our continued success depends on our ability to provide our partners and charter customers outstanding operational performance and customer service at a competitive price.  Our ability to do this depends on the commitment of and execution by our over 5,600 employees on a daily basis.

Our Business Segments

            2009 Business Segments

            For the year ended December 31, 2009, ExpressJet had two reportable segments which are the basis of our internal financial reporting: Contract Flying and Aviation Services.

            Contract Flying includes flying conducted in our Corporate Aviation (charter) division under the Amended Continental CPA and under the United Express Agreement.  Under Contract Flying, revenues are contractually determined, eliminating our exposure to fluctuations in yields and passenger volumes.  Under these arrangements, our partners also bear the risk and cost of fuel, aircraft ownership, airport services, and marketing and distribution.  We are responsible for the operation and maintenance of the aircraft.

            Aviation Services includes components related to our ground-handling services and ExpressJet Services.  Under ExpressJet Services’ brand, we paint aircraft and repair composite structures, aircraft interiors (including refurbishment of seats, galleys, lavatories and panels) and thrust reversers throughout our four facilities in the United States and Mexico.  In the first quarter of 2009, we sold substantially all of the assets of American Composites, LLC (“American Composites”), a wholly owned subsidiary previously part of ExpressJet Services.  Additionally, we sold an approximately 74,000 square foot building in Miami, Florida that was owned by XJT Florida, Inc. (“XJT Florida”) and leased to American Composites for use as a maintenance/composites shop.

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            Business Segments prior to 2009

            Prior to 2009, ExpressJet had three reportable segments: Branded Flying, Contract Flying, and Aviation Services.  Branded Flying, which began in 2007, included operations under the ExpressJet brand and a pro-rate flying arrangement (the “Delta Prorate”) under the Delta Airlines, Inc. (“Delta”) brand.  Revenues for this flying were derived from passengers flying on scheduled air service.  We were responsible for local market pricing, scheduling and revenue management, and the operation and maintenance of the aircraft.  Our flying under the Delta Prorate provided us with a prorated portion of the airfare plus an incentive for passengers connecting onto Delta's network.  In September 2008, we suspended Branded Flying in response to high fuel costs and other challenges facing the airline industry at such time.

            Contract Flying prior to 2009 included our Corporate Aviation (charter) division and our capacity purchase agreements with Continental and Delta.

Our Products and Services

            In 2009, we continued to build on our ability to provide unique group travel experiences through our Corporate Aviation (charter) division.  In addition, we expanded our contractual flying for other mainline air carriers through the United Express Agreement.  Prior to 2007, virtually all of our revenue came from our original capacity purchase agreement with Continental (the “Original Continental CPA”) supported by a fleet of 274 aircraft.  In recent years, our revenue streams have diversified to include our new partner, United, and a multitude of charter clients.  These new customers benefit from our offering of cost effective and reliable travel solutions.  Key to our product offering is an infrastructure base that allows us to leverage the economies and reliability of a fleet comprised on only one type of aircraft.

            This infrastructure is important to our success and supports:

            Contract Flying

            As of December 31, 2009, we averaged more than 1,045 daily Contract Flying flights, offering scheduled passenger service to over 134 scheduled destinations in North America, including Mexico, and also the Caribbean.  We generated $654.2 million of revenue, over 95% of our total consolidated revenue, in this segment during 2009.

            Continental Capacity Purchase and Other Agreements

            A significant portion of our revenue and cash flows is attributable to the Amended Continental CPA.  Under the Amended Continental CPA, 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.

            Under the Amended Continental CPA, we are not exposed to certain costs normally associated with operating an airline, as all reservations, sales, marketing and distribution, aircraft ownership and fuel costs are borne entirely by Continental.

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            2008 Amended Continental CPA .  In June 2008, we reached an agreement with Continental to amend the Original Continental CPA.  The Amended Continental CPA, which became effective July 1, 2008, has a seven-year term that is scheduled to expire on June 30, 2015.  Under the Amended Continental CPA, Continental compensates us at a pre-determined rate based on block hours flown and reimburses us for various pass-through expenses including passenger liability insurance, hull insurance, war risk insurance, landing fees and substantially all regional jet engine expenses under current long-term third-party contracts with no margin or mark-up.  Under the Amended Continental CPA, Continental is directly responsible for the cost of providing fuel and paying aircraft rent for all flights operated as Continental Express; therefore, these items are not included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.  The fixed block hour rates are considerably lower than the rates under the original agreement, though they are also subject to annual escalations tied to a consumer price index (capped at 3.5%) at each anniversary date, July 1.  The consumer price index escalation used for the July 1, 2009 rate adjustment was 1.94%.  We will continue to focus on aggressively managing costs as certain of our costs currently have contractual escalations that are higher then the current index escalation under the Amended Continental CPA, and the economic difficulties facing the entire airline industry.

            Concurrently with the execution of the Amended Continental CPA, we entered into a settlement agreement with Continental to release the parties’ claims relating to certain identified payments under the Original Continental CPA, including disputes previously disclosed as possible matters for arbitration.

            In September 2008, we agreed with Continental on the first amendment to the Amended Continental CPA in order to compensate us for our fixed costs considered in the calculation of the pre-determined block hour rates, which cannot be reduced as a result of the unanticipated reduction in aircraft utilization by Continental’s scheduling. We also agreed that if Continental, beginning in year two, increases its aircraft utilization above a pre-determined threshold, then it may receive discounts on the agreed, pre-determined block hour rates.

            In December 2008, we agreed with Continental on the second amendment to the Amended Continental CPA in order to clarify certain issues related to our revenue recognition, the fuel efficiency program in place in connection with the Amended Continental CPA and depreciation related to the aircraft we operate for Continental and excess inventory related thereto.

            Pursuant to the terms of the first and second amendments to the Amended Continental CPA, beginning in July 2009 and throughout the remainder of term of the Amended Continental CPA, if Continental increases utilization of our aircraft above a pre-determined threshold, then Continental will be entitled to receive a discount on the agreed, pre-determined block hour rates; provided that the aggregate discount received by Continental shall not exceed $10 million throughout the remainder of the term.

            In December 2009, we agreed with Continental on the third amendment to the Amended Continental CPA pursuant to which, among other things, we agreed to sublease eight aircraft from Continental that were previously operated as Continental Express under the Amended Continental CPA in order to meet our aircraft requirements under the United Express Agreement.

            Scope of Agreement.   For substantially all of 2009, the Amended Continental CPA covered 214 of Airlines’ existing fleet of 244 aircraft.  The Amended Continental CPA provides that we will fly a minimum of 190 aircraft for the remainder of the term.  Currently, we are flying 206 aircraft as Continental Express under the Amended Continental CPA, which reflects the removal of eight aircraft in late 2009 that we intend to use for flying under our United Express Agreement as well as our Corporate Aviation (charter) division. Continental does not have the ability to terminate the agreement without cause prior to the termination date and cannot reduce the number of aircraft covered under the agreement below 190 aircraft.  However, the Amended Continental CPA may cover less than 190 aircraft if there is an expiration of a Covered Aircraft head lease and there are no fifty-seat replacement aircraft (among the original 274 aircraft) being stored on behalf of Continental.   If, at any time prior to the end of the Amended Continental CPA term, Continental proposes to engage any third party to operate one of the original 274 aircraft for Continental, we will have the right of first opportunity to operate that aircraft. 

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            The agreement permits us to fly under our own code or on behalf of other airlines but prohibits our flying in certain markets under our own branded service.  The Amended Continental CPA states that:

            Our license from Continental to use the Continental Express name and other trademarks is non-exclusive.

            So long as scheduled flights under the Amended Continental CPA represent at least 50% of all our scheduled flights, or at least 200 of our aircraft are operated as Continental Express under the agreement, we are required to allocate our crews, maintenance personnel, facilities and other resources on a priority basis to scheduled flights under the agreement above all of our other flights and aircraft.

            Aircraft Financing.   Airlines currently leases or subleases all of its existing aircraft from Continental.  Under the Amended Continental CPA, Continental is required to purchase or lease from Embraer or its designee aircraft operated under the agreement, participate in the financing and to lease or sublease these aircraft to us.  Under the Amended Continental CPA, Continental is directly responsible for paying the aircraft rent for all flights operating as Continental Express; therefore, these items are not included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.  Aircraft withdrawn from the Amended Continental CPA become “Uncovered Aircraft” as defined in the agreement.  Lease payments relating to uncovered aircraft, including the eight aircraft subleased from Continental in late 2009, are at reduced rental rates, and rental payments for each such aircraft are fixed upon lease execution with no escalation clauses.

            During 2009, our remaining 50 options with Embraer for aircraft purchases within the Embraer ERJ-145XR, ERJ-145LR AND ERJ-145ER aircraft (the “ERJ-145 Family”) expired unexercised.

            We do not have the right to retain any aircraft removed from the Amended Continental CPA for use in our other operations if (i) they are removed by Continental as the result of its termination of the agreement for cause, (ii) we have already retained 150 aircraft, including the 38 being subleased at reduced rent, or (iii) they are among aircraft owned by Continental, currently 18 aircraft.  In all other events, we can elect to retain any of the aircraft withdrawn from the Amended Continental CPA, most likely upon termination of the agreement, either at the end of seven years or upon early termination of the aircraft lease.  In certain circumstances, in order to retain the aircraft we will have to provide Continental with a full release from the head lease for such aircraft.  Depending on the type of termination, there are procedures for notice and time for us to elect how many aircraft we will retain (with Continental selecting the individual aircraft and engines), wind-down schedules of differing lengths, and maintenance reimbursements.

            Airport Facilities, Slots and Route Authorities .   Most of the airport facilities that Airlines uses in its Continental Express operation are leased from airport authorities by Continental.  Under Airlines’ master facility and ground handling agreement with Continental, Airlines is entitled to use these facilities to fulfill its obligations under the Amended Continental CPA.  However, it is not permitted to use airport terminal facilities leased by Continental to service other carriers or operate flights under its own code without Continental’s approval.  Furthermore, we must use those facilities that are non-terminal facilities on a priority basis to support the scheduled flights that Airlines flies on behalf of Continental so long as those flights constitute at least 50% of our total scheduled flights or at least 200 of our aircraft are operated as Continental Express under the Amended Continental CPA.

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            Under the Amended Continental CPA, all terminal facility rent at Continental-managed airports is borne by Continental.  We continue to provide ground handling and support services under an industry-standard ground handling agreement; however, Continental is directly responsible for the station’s fixed expenses.

            Ground Handling.   During 2008, Continental began transitioning our ground handling services at all of their airport locations to an all Continental managed program, with us providing specific ground handling services at a majority of these stations under an industry-standard ground handling agreement at fixed rates, outside of the Amended Continental CPA. This transition was completed in 2009. Continental managed stations in which Continental has awarded us the ground handling contract are reflected in our Aviation Services line of business.

            Prior to that time, Airlines provided ground handling and other support services, including baggage handling, station operations, ticketing, gate access and other passenger, aircraft and traffic servicing functions for Continental at several of our airport locations under the Original Continental CPA.  In exchange, Continental paid us an amount equal to Airlines’ incremental cost for providing those services.  Continental provided the same services for Airlines at its stations, including its hub airports.  The cost for those services was based on the number of scheduled aircraft and the rates stipulated in the Original Continental CPA.

            Change of Control.   If we experience a change of control without Continental’s consent, Continental can terminate the Amended Continental CPA for breach.  Under the agreement, a change of control is defined as:

            Labor Disruption.   Upon the occurrence of a union-authorized labor strike, the Amended Continental CPA provides that:

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            In addition, a labor disruption other than a union-authorized strike may cause us to be in material breach of the Amended Continental CPA.  Under the agreement, whenever Airlines fails to complete at least 90% of its aggregate scheduled flights (based on available seat miles) in three consecutive calendar months or at least 75% of its aggregate scheduled flights (based on available seat miles) in any 45-day period (in each case, excluding flights cancelled due to union-authorized labor strikes, weather, air traffic control or non-carrier specific airworthiness directives or regulatory orders), we will be deemed to be in material breach of the agreement.  In addition, if we have a controllable completion factor for any two consecutive months of 97.5% or below, or a controllable on-time departure rate for any 60 consecutive days of 82.5% or below, we will be in material breach of the agreement.  A labor disruption other than a union-authorized strike could cause Airlines to fail to meet these operational requirements and, as a result, cause us to be in material breach of the agreement.  See further discussions below regarding remedies for breach of the agreement by either Continental or us.

            Term and Termination of Agreement and Remedies for Breach .   The Amended Continental CPA is scheduled to terminate on June 30, 2015.  Continental may terminate the agreement for cause without notice.  “Cause” is defined as:

            Continental may also terminate the agreement at any time upon our material breach that does not constitute cause, but continues uncured for 90 days after we receive notice of the breach.  In addition, Continental may terminate the agreement immediately without notice or giving us an opportunity to cure if it makes a reasonable and good faith determination, using recognized standards of safety, that there is a material safety concern with our operation of any flights under the Amended Continental CPA.

            If Continental materially breaches the agreement and fails to cure the breach within 60 days after we notify it of the breach, we will be entitled to obtain our payments directly from an airline clearing house from the 60th day for the duration of the default.  In addition, Continental and we are each entitled to seek damages in arbitration and to reach equitable remedies.

            Disposition of Aircraft upon Early Termination.   If Continental terminates the Amended Continental CPA for cause or breach, it will also have the right at that time to terminate Airlines’ leases or subleases for aircraft operating as Continental Express under the agreement and take possession of these aircraft.

            Amendment of Embraer and Rolls Royce Contracts.   We are prohibited, without Continental’s consent, from amending Airlines’ aircraft purchase agreements with Embraer for the original 274 aircraft to change the pricing, financing or leasing arrangements, or to make any other changes that may be expected to adversely affect Continental’s rights under the Amended Continental CPA or our ability to perform our obligations under the agreement.  We have also agreed to acquire Continental’s consent for any amendment of Airlines’ Embraer aircraft purchase agreements that reduce the financing or other obligations of Continental, provided that the amendment does not increase Airlines’ obligations under these agreements.  We are also prohibited, without Continental’s consent, from amending our power-by-the-hour agreement with Rolls Royce Corporation (“Rolls Royce”) in any manner that adversely affects Continental’s or our engine maintenance costs for the aircraft subject to the Amended Continental CPA.

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            Indemnification .   In general, we have agreed to indemnify Continental and it has agreed to indemnify us for any damages caused by any breach of our respective obligations under the Amended Continental CPA or caused by our respective actions or inactions under the agreement.

            For a detailed discussion of the Original Continental CPA, including prior years’ settlements, refer to Note 2, “Contract Flying,” in Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

            Other Agreements with Continental.   Airlines has a fuel purchasing agreement with Continental, under which Continental is directly responsible for the cost of providing fuel for all flights operating as Continental Express; therefore, fuel expense is not included in our Consolidated Statement of Operations for periods subsequent to July 1, 2008.  Airlines also has an administrative services agreement with Continental, under which Continental provides, at its expense, certain administrative support and information services in connection with the Amended Continental CPA.

            In addition, we have a tax agreement with Continental that provides, among other things, for our payment of all or a significant portion of the tax benefits we realize as a result of an internal reorganization performed before our initial public offering in 2002.  Since our initial public offering, we have made net payments of approximately $122.5 million to Continental under the tax agreement and could make additional payments to Continental through 2017.  Payments to Continental would be conditional on our achieving taxable income and our ability to utilize the tax benefit described above.  Refer to Note 8, “Income Taxes,” in Notes to Consolidated Financial Statements for further discussion of income taxes, including the tax agreement with Continental.

            United Express Agreement and Other Agreements

            General.   United announced in November 2009 that we were awarded a multiyear arrangement to fly 22 ERJ-145 aircraft as United Express.  In February 2010, ExpressJet announced the execution of the United Express Agreement, which agreement has an effective date retroactive to December 1, 2009.  The United Express Agreement has an initial term expiring on April 30, 2012 for 11 aircraft and on April 30, 2013 for the remaining 11 aircraft, and contains a renewal option, at United’s election, for additional periods up to a total term of five years.   Under this arrangement, United must notify ExpressJet of its intention to renew each group of aircraft not less than six month’s prior to the end of the term for such aircraft.

            We operated a total of 6 aircraft under the United Express Agreement as of December 31, 2009 and a total of 16 aircraft under the United Express Agreement as of February 15, 1010.  The remaining 6 aircraft will begin operating under the United Express Agreement on March 1, 2010.

            On February 15, 2010, we entered into the First Amendment to the United Express Agreement with United, pursuant to which we will fly up to 10 additional for United in the current ExpressJet livery from May 2010 though December 2010.  United will have the option to renew these supplemental aircraft for up to four additional periods of not less than thirty days per renewal period.  Under this arrangement, United must notify ExpressJet of its intention to renew for the initial renewal period no later than June 15, 2010 for the first six supplemental aircraft and August 15, 2010 for the remaining four additional aircraft.  In an effort to provide United with increased flexibility, the amendment allows United to extend the renewal deadline for each aircraft upon certain terms and conditions.  If United elects not to extend the term of the supplemental aircraft, the ten aircraft will be removed from service, and placed into the Corporate Aviation (charter) operation.

            All of the aircraft operated as United Express will be sourced from our Corporate Aviation (charter) division and leased as necessary from alternate sources.

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            Under the terms of the United Express Agreement, United will be responsible for scheduling, marketing, pricing and revenue management on the aircraft and collecting all passenger revenues under the United brand.  Airlines' operates, maintains and finances the aircraft.

            We received payments under the United Express Agreement at a pre-determined rate based on block hours and departures flown and we are reimbursed us for various pass-through expenses including passenger liability insurance, hull insurance, war risk insurance, landing fees and fuel.

            The United Express Agreement also provides for incentives and penalties based upon Airlines’ performance, including on-time arrival performance and completion percentage rates.

            Warrant.   As part of the United Express Agreement, on February 17, 2010, we issued a warrant to United for the purchase of 2.7 million shares of common stock with an exercise price of $0.01 per share of common stock.  We did not issue this warrant for any specified consideration, but instead in connection with The United Express Agreement covering 22 ERJ-145 aircraft for United Express service effective December 1, 2009.  The certificate representing the warrant contains (and certificates representing the underlying shares, when issued, will contain) restrictive legends preventing sale, transfer or other disposition, unless registered under the Securities Act or pursuant to an exemption thereunder.  The warrant shall terminate and become void as of the earlier of (a) the time and date the warrant is fully exercised with respect to all warrant shares pursuant to the warrant and (b) 5:00 p.m., central time, on the date of the expiration (with respect to all tranches of aircraft and including renewal terms) or earlier termination of the United Express Agreement; provided that if the United Express Agreement is terminated due to any material default or breach by ExpressJet, the warrant shall not terminate or become void and shall continue in full force and effect until April 30, 2013.

            For additional information regarding the United Express Agreement, refer to Item 1A, Risk Factors .

            Corporate Aviation

            In late 2009, 30 aircraft were assigned/utilized within our corporate aviation (charter) division, and subject to long-term agreements and other ad-hoc charter service arrangements.  Our Corporate Aviation (charter) division continues to focus on corporate shuttles, entertainment / sports, and government businesses.  As of December 31, 2009, our Corporate Aviation (charter) division had firm contracts for over 50% of budgeted revenues for 2010.

            Corporate Aviation’s goal is to provide group travelers a comfortable, cost-effective and fully customizable travel experience that is unmatched by our competitors.  Our travel solutions are provided to corporations, collegiate and professional sports teams, government entities, hotel and gaming properties, hospitality companies, bands and other entities, including airlines.

            The aircraft are flown under Airlines’ operating certificate issued by the Federal Aviation Administration (the “FAA”).

            Fuel

            Under the Amended Continental CPA, the United Express Agreement and various charter agreements, we are protected from the volatility of fuel prices; however, if the unavailability of fuel caused us to cancel flights, our revenues would be reduced.  We continue to work diligently with Continental, United and our fuel providers to ensure that fuel is available and ready for all our flights as part of our reliability and on-time performance program.  Under the United Express Agreement, we agreed to a fuel risk sharing program with United whereby our markup is tied to an index consisting of the gap between increases in the price of fuel and increases in United’s passenger revenue per available seat mile.  As the gap between these two metrics rise, our markup could be reduced up to 4 percentage points.

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            Aviation Services

            Revenues generated by Aviation Services totaled $42.6 million in 2009.  This segment includes ground handling services and aircraft cleaning services.  Ground handling services include baggage handling and ticket counter services for several airlines including Continental, American Airlines and Allegiant Air at locations across the United States.

            Our Aviation Services segment also includes ExpressJet Services.  These entities are the North American partner to three major European original equipment manufacturers and provide composite, sheet metal, paint, interior (including seat refurbishment) and thrust reverser repairs throughout our four facilities in the United States and Mexico.

Aircraft Fleet

            Our Fleet

            We operate a fleet of 244 aircraft, all within the ERJ Family of jets manufactured by Embraer.  The Amended Continental CPA provides for the continued lease or sublease of our 244 Embraer regional jets.  For substantially all of 2009, 214 aircraft operated under our Amended Continental CPA and 30 aircraft flew within our Corporate Aviation (charter) division.

            The operational capability of the ERJ-145 is 1,100 miles.  The ERJ-145XR, with a 1,600 mile range, continues to create potential expansion opportunities for us whether under our network or other carriers’ networks to more economically serve cities that are the right size for our aircraft.  We are currently the only operator of the ERJ-145XR in the world.  Each aircraft is equipped with advanced technology and certifications that aid our operation in challenging weather conditions and flying efficiently at higher flight altitudes.

            The aircraft dedicated to our mainline partners offer a seamless jet service experience to their    passengers.  The planes feature overhead baggage compartments, under-seat baggage storage, leather seating, lavatories, in-flight meal and beverage service capabilities and jet-bridge loading in most locations.

            Aircraft dedicated to our Corporate Aviation (charter) division and the United Express Agreement have redesigned seats for enhanced comfort and aircraft in our Corporate Aviation (charter) division feature complimentary XM Satellite Radio with over 100 channels of entertainment.  During 2009, our Corporate Aviation (charter) division operated eight aircraft in a standard 41 seat configuration which provided additional space for the customer.  Due to demand for our 50 seat product within the United Express Agreement, we began to reconfigure all aircraft back to the standard 50 seat configuration in late 2009 and plan to complete the modifications during the first half of 2010.

            During 2009, our final 50 options with Embraer for aircraft purchases within the ERJ-145 Family expired unexercised.

            Maintenance of Our Aircraft

            We maintain our aircraft primarily using our own trained and FAA-certified personnel and facilities.  We perform routine maintenance and inspection of our aircraft engines and airframes at intervals required by the FAA.  We perform line and heavy maintenance at our facilities in Cleveland, Ohio; Houston, Texas; Knoxville, Tennessee; Newark, New Jersey; Richmond, Virginia; and Shreveport, Louisiana.  We also perform line maintenance at our satellite maintenance stations.  We maintain an inventory of aircraft spare parts in an effort to ensure the reliability of our operations and utilize a computerized tracking system to increase maintenance efficiency and avoid excess inventory of spare parts.

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            We have a power-by-the-hour agreement with Rolls Royce to maintain the engines on our aircraft through April 2015 (the “Rolls Agreement”).  Under the Rolls Agreement, we are charged a fixed rate based on flight hours incurred during a month.  The rates are subject to annual revisions based on specific labor and materials indices.  We also have power-by-the-hour agreements with other key vendors to cover various high value components and systems on the aircraft, such as auxiliary power units, avionics, environmental controls, tires, wheels and brakes.  For 2009, approximately 72% of our maintenance, materials and repairs cost consisted of power-by-the-hour expenses.  We believe that these agreements, coupled with our ongoing maintenance program, reduce the likelihood of unexpected maintenance expense during the aircraft lease terms and greatly mitigate accelerating maintenance costs commonly associated with aging aircraft.

Competitors

            The airline industry is highly competitive.  ExpressJet competes principally with other regional airlines providing long-term service to legacy carriers, aircraft operators providing customized on-demand charter services, and companies who offer aircraft ground handling services.

            We are one of several competitors in the commercial airline market.  Our competitors include Republic Airways (“Republic”), Chautauqua Airlines (“Chautauqua”), Mesa Airlines (“Mesa”), Pinnacle Airlines (“Pinnacle”), Trans States, Air Wisconsin, and SkyWest Airlines (including Atlantic Southeast Airlines) (“SkyWest”).  We also compete with other airlines, such as American Eagle, Comair, Compass, Mesaba and Horizon Airlines, which are wholly owned subsidiaries of major airline holding companies.  One of the principal challenges for airlines operating regional jets under either fixed-fee or revenue-sharing arrangements, in addition to depending on the financial health of their partners, is the ability to maintain reliable and seamless operations with a competitively low cost structure.

            Given the increased regulatory and media scrutiny on regional airline carriers in the aftermath of the Colgan Q400 accident in Buffalo, New York that occurred in February 2009, we believe we are well positioned to respond to any additional regulatory requirements, compared to our competitors.  During the third quarter of 2009, we began implementation of our Advanced Qualification Program.  This program complements our current Flight Operations Quality Assurance (FOQA) Program, Aviation Safety Action Program (ASAP) and Threat and Error Management training and helps us in our adoption of an overall Safety Management System.  We currently incorporate the costs associated with these programs into our financial results and do not expect large additional expenditures as we move to an overall Safety Management System.  Our workforce is also very senior and while it causes additional pressures on our expenses, we believe a senior workforce, in addition to managing all training for our flight crews in-house, provides us a distinct advantage for responding to any additional regulatory requirements in a cost-effective and efficient manner.

            Due to variations in terms under the agreements pursuant to which regional airlines operate, cost comparisons between regional airlines are difficult.  However, we believe ExpressJet is the best operator in the industry and offers to Continental and United two of the most competitively priced agreements in the industry.  Both of our main-line partners have benefited from our continued focus on cost, reliability and operating efficiencies associated with a single fleet type.  Finally, our position as the launch customer for the ERJ-145 Family and the reduced aircraft rent exposure provided under the Amended Continental CPA provides us some of the most favorable fleet financing in the industry.

            Our Corporate Aviation (charter) division competes in varying degrees with corporate aviation departments, non-scheduled aircraft operators and scheduled air carriers offering non-scheduled service.  We are the largest on-demand 50-seat aircraft operator and compete primarily with operators offering fewer seats.  We operate under a part 121 certificate (complete commercial airline operator certificate from the FAA), which requires higher safety standards than operators flying under a part 135 certificate (private airline operator certificate from the FAA).  Some regional airlines, such as SkyWest and Republic, offer similar products directly to customers or through subcontract agreements with legacy carriers such as Continental or Delta. Growing awareness of our brand as a high quality product is enabling us to achieve continued market penetration.

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            Our Aviation Services division competes with both airlines and non-airlines for long-term contracts to provide ground handling, maintenance services and paint services.  Some of these entities include Aircraft Service International, Air Wisconsin, American Eagle, Delta Global Services, Pinnacle, PrimeFlight, Servisair, SkyWest and Worldwide Flight Services.

Industry

            The United States airline industry has been very competitive since it was deregulated in 1978.  Since then, various business models have been developed and matured to offer commercial air service.  These models include hub-and spoke models (dominated by mainline carriers such as Continental and United) regional feeder models in support of the hub-and-spoke model (such as ExpressJet or Skywest), and low-cost models (such as AirTran and Southwest Airlines) that compete on price at the expense of convenience and onboard amenities.  The regional feeder model, developed originally by props and turbo-props, has largely given way to regional jets that now provide main-line legacy carriers the ability to connect small markets and thin time-channels in the United States, Mexico and Canada more economically than with larger aircraft.

            The hub-and spoke business model, along with the regional feeder model that supports it, attempt to gain and sustain market share by:

            Commercial airlines have faced unprecedented challenges over the last few years including volatile fuel prices and an economy in recession.  Higher fuel costs have resulted in upward cost pressures, lower demand and capacity reductions that can negatively affect the demand for regional aircraft capacity.  Inversely, as fuel prices recede or the economy weakens, the economics of regional aircraft can improve as lower demand necessitates equipment substitutions (down gauging) from higher capacity aircraft to regional jets.  Going forward, it is difficult to predict how demand for regional aircraft may be affected by changes in the economy or fuel price environment.

Industry Regulation

            We operate under a certificate of public convenience and necessity issued by the Department of Transportation (“DOT”).  This certificate may be altered, amended, modified or suspended by the DOT if public convenience and necessity so require.  The DOT has jurisdiction to prohibit certain unfair or anti-competitive practices, determine carrier fitness to serve and mandate certain conditions of carriage.  The DOT can bring proceedings for the enforcement of its regulations under applicable federal statutes, which proceedings may result in civil penalties, revocation of certificate authority or criminal sanctions.

            We also operate under an air carrier operating certificate issued by the FAA which may be amended, modified, suspended or revoked if safety in air commerce or air transportation and the public interest so require.  The FAA regulates airlines, primarily in the areas of flight operations, maintenance, ground facilities, hazardous materials and goods handling and other technical matters.  Under these regulations, we have established, and the FAA has approved, proper cargo training and handling programs and maintenance program for the aircraft that ExpressJet operates, which provides for the ongoing maintenance of these aircraft, ranging from frequent routine inspections to major overhauls.  The FAA enforces its regulations by the imposition of civil penalties or revocation of certificate, which can result in adverse financial impact to our operations.

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            Based on conditions in the industry, or as a result of Congressional directives or statutes, the DOT and the FAA from time to time propose and adopt new regulations or amend existing regulations, such as the new consumer rule that limits airline tarmac delays and provides other passenger protections, which may impose additional regulatory burdens and costs on us.  The new rule, which will take effect in April 2010, will levy heavy fines against an airline when they subject customers on domestic flights to a tarmac delay of three hours or more without affording them the opportunity, within that timeframe, to deplane.  Carriers will also be required to provide adequate food and potable drinking water for passengers within two hours of the aircraft being delayed on the tarmac and to maintain operable lavatories.  Imposition of such laws and regulations on air carriers will increase our cost of operation, and/or limit our operating discretion as our mainline partners could more frequently cancel flights resulting in a negative impact to our block hours.

            The Aviation and Transportation Security Act of 2001 (the “ATSA”) federalized substantially all aspects of civil aviation security and created the Transportation Security Administration (“TSA”) under the Department of Homeland Security.  The implementation of the requirements of the ATSA and other security laws and regulations resulted in increased costs for airlines and passengers, as well as delays and disruptions in air travel.  The TSA issued regulations implementing the ATSA, including a requirement that we adopt an air carrier security program.  Failure to comply with TSA rules or with our security program may result in the imposition of substantial civil penalties.  The law also requires that checked baggage be screened by explosives detection systems, which has required significant equipment acquisition by the government and the implementation of facility and baggage process changes.  Further implementation of the requirements of the ATSA and other security laws and regulations have resulted in increased costs for airlines and passengers, delays and disruptions to air travel and reduced demand.

            In response to the ATSA, the TSA has initiated new security measures.  Two of the security measures that will have an impact on air carriers are the Secure Flight program and the proposed rule for domestic and foreign FAA-certificated aircraft repair stations.

            Secure Flight shifts pre-departure watch list matching responsibilities from individual air carriers to TSA and has required significant changes to the airlines’ reservation systems.  Air carriers are now required to obtain additional passenger information, such as the passenger’s full name and date of birth, and the printing of boarding passes must be inhibited until air carrier is notified by TSA that the passenger has been cleared for travel.  The TSA's goal is to vet 100 percent of all domestic commercial flights by early 2010 and 100 percent of all international commercials flights by the end of 2010.

            The proposed rule for domestic and foreign FAA-certificated aircraft repair stations will require repair stations to adopt a security program that includes access controls for facilities as well as aircraft and components, and restrict access by unauthorized individuals.  The implementation of the requirements of this rule will result in increased costs for repair stations and airlines.

            In the maintenance of our aircraft and ground equipment, we handle and use many materials that are classified as hazardous materials which have the potential to generate hazardous and non-hazardous waste.  The Environmental Protection Agency (EPA) and similar local agencies have jurisdiction over the handling and processing and disposal of these materials.  We are currently monitoring and evaluating the recently released Airline Drinking Water Rule (ADWR) mandated by the EPA and Federal Drug Administration (FDA) which requires airlines to develop and implement a fleet specific aircraft water system sanitization, testing and sampling program as required under the new rule.  We are also subject to the oversight of the Occupational Safety and Health Administration concerning employee safety and health matters.  We are subject to the Federal Communications Commission’s jurisdiction regarding the use of radio frequencies. Federal law establishes maximum aircraft noise and emissions limits.  All of our aircraft comply with currently applicable federal noise and emissions regulations.  Federal law generally preempts airports from imposing unreasonable local noise rules that restrict air carrier operations.  However, under certain circumstances, airport operators may implement reasonable and nondiscriminatory local noise abatement procedures, which could impact our ability to serve certain airports, particularly in off-peak hours.

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            Other regulatory actions that may be taken in the future by the U.S. government to address climate change or limit the emission of greenhouse gases by the aviation sector are unknown at this time.  Concerns about climate change and greenhouse gas emissions, in particular, may result in the imposition of additional legislation or regulation.  Such legislative or regulatory action by the U.S., state or foreign governments currently or in the future may adversely affect our business and financial results.  Refer to Item 1A, Risk Factors, for discussion of our risks related to these regulatory actions.

Employees

            Our past and continuing success depends on the ability of our employees to execute effectively on a daily basis. As of December 31, 2009, we had over 5,600 employees, comprised of approximately 2,100 pilots and instructor pilots, 1,000 flight attendants, 600 customer service personnel, 900 mechanics, 100 dispatchers and 900 supervisors, management and support personnel.

            Labor costs are a significant component of airline expenses and can substantially impact our results.  While there can be no assurance that our generally good labor relations and high labor productivity will continue, a crucial component of our business strategy is the preservation of good relations with our employees, approximately 73% of whom are represented by unions.

            The following table reflects, as of December 31, 2009, our principal collective bargaining agreements and their respective amendable dates:

            Approximately 27% of our employees are not covered by collective bargaining agreements.

            We are currently in negotiations with our Dispatchers and Mechanics whose contracts became amendable in 2009.  We will begin negotiations with our Flight Attendants and Pilots as their contracts become amendable in 2010.  Our contract with our production workers does not have a specified term but salaries are typically renegotiated each year.  We anticipate these amendments to be cost neutral for us (i.e., any increase in wages and benefits will be offset by productivity gains).

Securities Exchange Act Reports

            Our corporate website is www.expressjet.com.  In addition to other information, the following materials on our website are free of charge:

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            Stockholders can print a copy of the foregoing materials from our website or may request a copy from the Secretary of the Company by writing to the address on the cover of this report.

            As described in the Principles of Conduct, we have established means for our employees to report concerns of questionable accounting, auditing and other business practices to our Director of Internal Audit and to our Corporate Compliance Officer.  Our employees may report concerns through an employee hotline and the following email address: xjtinternalaudit@expressjet.com .  Persons desiring to communicate with the independent members of our Board of Directors may also do so through this email address.

            On June 15, 2009, our Chief Executive Officer certified to the New York Stock Exchange (“NYSE”) that he was not aware of any violation by the Company of the Exchange's corporate governance listing standards.  On December 4, 2009, we announced the our President and Chief Executive Officer, Jim Ream, would be retiring effective January 1, 2010 and that our Board of Directors appointed T. Patrick Kelly, a current member of our Board to serve as Interim President and Chief Executive Officer effective January 4, 2010.  As required by Section 303A of the NYSE Listed Company Manual, we delivered an interim written affirmation to the NYSE on January 20, 2010, following the departure of our Mr. Ream.  Our Interim President and Chief Executive Officer and Chief Financial Officer have made the certifications required under Section 302 of the Sarbanes-Oxley Act, which are included as exhibits to this report.

Item 1A.  Risk Factors

            Our business, results of operations and financial condition may encounter risks in addition to those described in this report.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also adversely impair or offset our business, results of operation and financial condition.

            Our operations under the Amended Continental CPA may not be profitable considering impact of low escalation adjustment to the fixed block hour rates compared to living adjustments for our labor work groups.

            We amended and restated the Original Continental CPA on June 5, 2008, which became the Amended Continental CPA.  The amendment became effective on July 1, 2008. In contrast to the Original Continental CPA in effect before the amendments, which had provided for us to earn a 10% margin on our expenses incurred flying as a regional carrier for Continental; the Amended Continental CPA now has fixed block hour rates, which are subject to an annual adjustment tied to a consumer price index (capped at 3.5% per annum).  Under the Amended Continental CPA, there is no downward limit for the annual adjustment therefore, in prolonged deflationary periods, the annual adjustment can be a negative percentage. The rates under the Amended Continental CPA are considerably lower than the pre-amendment rates and will result in lower overall revenues.  At this time, it is difficult to quantify the overall financial impact of the changes because the pre- and post-amendment agreements are substantially different, including with respect to the services covered.  Our results will depend, in part, on the utilization of our aircraft and the successful reduction of operating costs.  We originally derived significant amounts of revenue from the reimbursement, plus the 10% margin, for aircraft rent, fuel and other expenses.  Those expenses, and the corresponding revenue, will no longer be reflected on our financial statements as they will be incurred directly by Continental.  Moreover, the rates we earn will be fixed, except for certain costs that will continue to be trued-up with no margins, such as property taxes, sales and use taxes and landing fees and not tied to our expenses; consequently, we could be unprofitable if we do not manage our costs effectively.  We would need to aggressively reduce managed expenses under the agreement if aircraft are removed from service and returned to Continental.

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            We remain dependent on Continental for the majority of our revenue and cash flows.

            For substantially all of 2009, we operated approximately 88% of our fleet under the Amended Continental CPA and continue to rely heavily on the financial and operational stability of Continental.  The domestic airline environment in the United States continues to be extremely challenging for all carriers and Continental experienced a loss for the full year of 2009.  Continental has indicated that its own business and financial results are subject to a number of risk factors, many of which are uncontrollable, including the amount of debt it carries, volatile fuel prices, delays in scheduled aircraft deliveries, its high labor and pension costs, service interruptions at one of its hub airports, disruptions to the operations of any of its regional operators, disruptions in its computer systems, and industry conditions, including the airline pricing environment, an economic downturn in the U.S. and global economies, industry capacity decisions, industry consolidation, terrorist attacks, regulatory matters, excessive taxation, the availability and cost of insurance, public health threats and the seasonal nature of the airline business.

            We cannot predict the future impact of these factors on Continental.  Moreover, changes in fare structures (most importantly in relation to business fares), booking patterns, low-cost competitor growth, customers’ direct booking on the internet, volatile fuel prices, competitors emerging from bankruptcies with reduced cost structures, rumored industry consolidation and other changes in the industry cannot be predicted at this time, but could have a material adverse effect on both Continental’s and our financial condition, liquidity and results of operations.

            Our Amended Continental CPA could be terminated.

            For substantially all of 2009, we operated 214 aircraft for Continental under the Amended Continental CPA.  Continental retains the right to reduce the number of aircraft to a minimum of 190 aircraft at any time during the remainder of the initial term ending on June 30, 2015.   Additionally, Continental can also terminate the agreement:

            We could lose access to our aircraft, facilities and regulatory authorizations if the Amended Continental CPA were terminated.

            We currently lease or sublease all of our aircraft from Continental.  If Continental terminated the Amended Continental CPA for cause, it would have the right to terminate our leases and subleases for aircraft operated for Continental under the agreement at the time of termination.  Additionally, if Continental’s financial condition deteriorated and it filed for bankruptcy protection, it would have the ability to reject the leases or subleases on our aircraft.  There can be no assurance that Continental will have sufficient liquidity to fund its future operations and other financial obligations, especially in the event additional adverse factors beyond its control occur, such as declining passenger revenue mix from global economic recessions, volatile fuel prices, terrorist attacks or adverse regulatory rulings.

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            Additionally, if the Amended Continental CPA were terminated for any reason, including termination at the end of its term on June 30, 2015, we could lose access to some or substantially all of our airport facilities and other services that Continental currently provides to us, as well as our take-off and landing slots and route authorities.  Continental leases most of the airport facilities that we use.  We could be required to vacate the terminal facilities (or all facilities if the termination resulted from our material breach of the Amended Continental CPA) that are subleased to us by Continental, and to use commercially reasonable efforts to assign to Continental or its designee any lease in our name where we fly for Continental.  Consequently, to offer commercial airline services in the same markets, we would have to arrange to use the same or other airport facilities, take-off or landing slots, route authorities and other regulatory authorizations used for scheduled flights at potentially higher rates.  In such event, we might not be able to gain appropriate access to airport facilities, slots or other authorizations at economically viable prices or at all.

            We may be responsible for additional taxes as a result of our tax agreement with Continental.

            Holdings has a tax agreement with Continental that provides, among other things, for payments to Continental of all or a significant portion of the tax benefits realized as a result of an internal reorganization done prior to Holdings initial public offering in 2002.  Since that time, Holdings has made net payments of approximately $122.5 million to Continental under the agreement and could pay Continental additional amounts through 2017.  Payments would be conditional on achieving taxable income and the ability to utilize tax benefits as allowed.

            Refer to Note 8, “Income Taxes,” in Notes to Consolidated Financial Statements for further discussion of income taxes, including the tax agreement with Continental.  If it were determined, as a result of an income tax audit or examination, that a significant amount of these tax benefits should not have been available, thus requiring us to pay additional taxes, interest and penalties to one or more tax authorities, and if at that time Continental were unable to indemnify Holdings for these amounts as contemplated in the tax agreement, then Holdings could be responsible for such tax payments, interest and penalties.

            Our operations under the United Express Agreement may not be profitable.

            We agreed to absorb certain expenses and make certain short-term rate adjustments associated with the transition of our aircraft into the United Express Agreement.  The foregoing includes expense related items such as painting the aircraft, interior refurbishments and a temporary mark-up discount through June 2010.

            Our United Express Agreement could be terminated.

          The United Express Agreement is subject to early termination in various circumstances including:

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            Exercise of the Warrant issued to United could significantly dilute our current stockholders.

            In connection with the United Express Agreement, we entered into an agreement with United which permits United to purchase up to 2.7 million shares of common stock with an exercise price of $0.01 per share of common stock.   The exercise of the rights under this agreement by United will significantly change the ownership of our current stockholders.  In addition, the fair value of the warrant will be reflected in our financial statements as a reduction of passenger revenues over the life of the United Express Agreement, thereby negatively impacting the expected operating results of our Contract Flying segment.

            Our Corporate Aviation (charter) operations and other aviation services may affect our ability to operate profitably.

            The aircraft transitioned in 2006 from the Original Continental CPA and in 2008 from our Branded Flying operation to our Corporate Aviation (charter) division have been unprofitable to date.  Currently, the 38 aircraft deployed outside of the Continental Express operations and the associated risks relate to approximately 16% of our fleet; however, if the Amended Continental CPA were terminated, our fleet could be significantly reduced or these risks could extend across our entire fleet. The risks affecting our Corporate Aviation (charter) operations include:

                We may experience cost pressure as our labor force becomes more senior, and if attrition increases, we may not be able to replace our current workforce with candidates that meet our high recruiting and training standards.

            Labor costs, including medical and workers compensation costs, constitute a significant percentage of our total operating costs, and wage rates, in general, are increasing due to cost of living adjustments within our collective bargaining agreements.  In an effort to return to profitability, we reduced our work force significantly and obtained wage and salary concessions from each of our employee groups.  As a result, our employees may elect to seek other employment opportunities, thereby increasing our recruiting and training costs.  We cannot guarantee that we will be able to continue to find qualified personnel to fill any vacancies that may arise in the future.  As our workforce matures, we may not be able to sustain the impact of the resulting higher wage rates if competition or other economic conditions do not permit us to achieve necessary revenues.

            We may not be able to successfully negotiate new collective bargaining agreements on satisfactory terms.

            Approximately 73% of our employees are covered by collective bargaining agreements.  We are currently in negotiations with our dispatchers and mechanics whose contracts became amendable in 2009.  We will begin negotiations with our flight attendants and pilots as their contracts become amendable in 2010.  Deterioration in our labor relationships could significantly impact our operations and financial results.  Our contract with our production workers does not have a term but salaries are typically renegotiated each year.  We may not be able to successfully negotiate new collective bargaining agreements on satisfactory terms.

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            Amendments to the terms of the convertible notes increased our obligations and put our assets at risk.

            In August 2008, we commenced a repurchase offer for the 4.25% convertible notes due 2023 (the “Original 4.25% Convertible Notes due 2023”) and provide written notice to the trustee of our intention to pay the repurchase price wholly in shares of our common stock (the “Notes Exchange Offer”).  As a result and pursuant to the terms of the exchange offer, the Company issued 16,382,498 shares (reverse split adjusted) of common stock in payment of the repurchase price for the $59.7 million principal amount of the Original 4.25% Convertible Notes due 2023 validly tendered and to settle accrued and unpaid interest due August 1, 2008.

            Following the completion of the Notes Exchange Offer, $68.5 million aggregate principal of the Original 4.25% Convertible Notes due 2023 remained outstanding.  As previously disclosed, we have unilaterally amended the indenture governing the Original 4.25% Convertible Notes due 2023 in order to provide improved terms and additional flexibility for the note holders remaining after the exchange offer, including:

            Noteholders of record on August 2, 2008, automatically began to receive the benefits of the supplemental indenture that become effective the same day.  From August 2, 2008 forward, the notes are referred to as the “11.25% Convertible Secured Notes due 2023”.  The terms of the 11.25% Convertible Secured Notes due 2023 could adversely affect our financial condition and make it more difficult to satisfy our obligations under the notes and our other contractual and commercial commitments.  The amendments also increased the cash required to service the interest on the notes.  If our business does not generate sufficient cash flow from operations in the future, we may be required to take actions such as curtailing our business activities, reducing capital expenditures, selling assets, incurring additional debt or seeking bankruptcy protection.  We may not be able to accomplish any of these actions on terms acceptable to us, or at all.  In addition, if we are unable to repay our obligations under the notes, the trustee could seek to foreclose on the assets securing the notes.  As of December 31, 2009, $52.1 million of our 11.25% Convertible Secured Notes due 2023 remain outstanding.

            Conversion of our convertible notes could dilute the ownership interest of existing stockholders.

            On August 1, 2011, holders of our outstanding 11.25% Convertible Secured Notes due 2023 may require us to repurchase their notes.  We may pay the repurchase price in cash or in stock.  The conversion of some or all of our 11.25% Convertible Secured Notes due 2023 would dilute the ownership interests of existing stockholders.  Any sales in the public market of the common stock issuable upon conversion of the notes could adversely affect prevailing market prices of our common stock.  In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could further depress the price of our common stock.  Finally, i f we do not continue to meet the listing standards with the NYSE, we could be subject to delisting, which would constitute a default under our 11.25% Convertible Secured Notes due 2023 and could result in the obligation to repay the notes in cash at par.  There is currently $52.1 million aggregate principal amount outstanding of our 11.25% Convertible Secured Notes due 2023.

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            We may be unable to obtain all of the parts or related support services we expect from Embraer to operate our aircraft.

            We operate a single fleet type produced by a single manufacturer; consequently, our operations could be materially adversely affected by:

            Conversely, if we choose to operate another aircraft type in the future, for a time we will not have the maintenance expertise we have acquired with our current fleet, training costs would increase, and parts and inventory costs would rise.

            Maintenance costs will likely increase as the average age of our fleet increases.

            As the average age of our fleet increases, our aircraft maintenance costs will likely increase.  We perform routine inspection and maintenance of our aircraft engines and airframes at intervals required by the FAA. 

            Additionally, under the Rolls Agreement, we are charged a fixed rate based on flight hours incurred during a month.  The rates are subject to annual revisions based on specified labor and material indices.  We also have power-by-the-hour agreements with other vendors to cover various components and systems on our aircraft.

            Our average maintenance costs under these agreements could increase and adversely impact our results of operations. We may also incur increased maintenance costs if we have to address any new FAA or Embraer maintenance directives. 

            For the majority of our aircraft not covered in the Amended Continental CPA, we expect to incur unreimbursable costs related to the replacement of certain life-limited parts, primarily engine parts, in the near future as these parts approach their cycle limits.

            Reductions in insurance coverage or increases in rates could adversely impact our operations and financial results.

            The terrorist attacks of 2001 led to a significant increase in insurance premiums, as well as a decrease in the coverage available to commercial air carriers. We carry insurance for public liability, passenger liability, property damage and damage to our aircraft.  The Homeland Security Act of 2002 currently requires the federal government to provide third party, passenger, and hull war-risk insurance coverage to commercial air carriers through August 31, 2010.  If any of our insurance programs terminated, the Company would likely face a material increase in the cost of war-risk insurance.

            Consolidations in our industry can adversely impact our current business strategy.

            There have been numerous mergers and acquisitions within the U.S airline industry since its deregulation in 1978, and there may be additional mergers and acquisitions in the future.  Any airline industry consolidation could substantially alter the competitive landscape and may result in changes in our business strategy.  Consolidation involving legacy carriers in our industry could, in the long run, result in the reduction of capacity for network-feed services to be provided by the regional carriers, which could have a material adverse effect on us.

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            Our cost structure may not be competitive with some of our competitors.

            Our costs are mainly driven by the flight schedule determined by Continental, Continental’s own cost structure or factors that are outside our control, or in some instances even Continental’s control (such as aircraft rent, fuel, insurance and property taxes).  As a significant portion of our costs are wages that are contractually agreed with our labor work groups, we may not be able to restructure our costs effectively to compete with other carriers.

            Our business is subject to extensive government regulation and we may incur additional costs to comply with such regulations.

            Our business is subject to extensive government regulation.  As evidenced by the enactment of the ATSA, airlines are subject to extensive regulatory and legal compliance requirements that can or may result in significant costs.  The FAA and other governmental agencies such as the EPA from time to time issue directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures.  Some requirements cover, among other things, excessive tarmac delays, security measures, collision avoidance systems, potable water standards, noise abatement and other environmental matters, commuter aircraft safety and increased inspections and maintenance procedures conducted on older aircraft.

            We expect to continue incurring expenses to comply with these regulations.  In addition, if any of these regulations, including the new rule adopted by the DOT limiting airline tarmac delays, caused us to cancel flights, it would result in a reduction in our revenue.

            Other regulatory actions that may be taken in the future by the U.S. government to address climate change or limit the emission of greenhouse gases by the aviation sector are unknown at this time.    Concerns about climate change and greenhouse gas emissions, in particular, may result in the imposition of additional legislation or regulation.   Such legislative or regulatory action by the U.S., state or foreign governments currently or in the future may adversely affect our business and financial results.  

            Additional laws, regulations, taxes and airport rates and charges are proposed from time to time that could significantly increase the cost of airline operations or reduce revenue.  Such laws, taxes and regulations have affected all facets of our operations from security at airports, restrictions on landing, take-off, routes, restrictions on international routes (which can change suddenly depending on the current arrangements between the United States and the foreign governments), and increases in landing fees and other airport facility charges.  We cannot be certain that current laws or regulations, or laws or regulations enacted in the future, will not adversely affect us.

            We may be adversely affected by factors beyond our control, including weather conditions and the availability and cost of fuel .

            As climate changes cause more severe weather occurrences, including periods of fog, icy conditions, storms, hurricanes or other adverse weather conditions, our operations could be materially impacted if flights were significantly reduced.  Under the Amended Continental CPA and the United Express Agreement, we are not fully protected against cancellations due to weather or air traffic control restrictions, which could adversely affect our operating results and our financial condition.

            Additionally, in operating our aircraft for other airlines or under charter contracts we may be exposed to the volatility of fuel prices.  Both the cost and availability of fuel are subject to various economic and political factors and events occurring throughout the world.  Significant changes or extended periods of high fuel cost or fuel supply disruptions could materially affect our operating results.  Our ability to pass on increased fuel costs through contract pricing is limited by several factors, including economic and competitive conditions.  Additionally, under the Amended Continental CPA and the United Express Agreement, if the unavailability of fuel caused us to cancel flights, our incentive revenue would be reduced.  The cost and availability of adequate supplies of fuel could have a material adverse effect on our operating results and our financial condition in the future.

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            Our reliance on technology and the technology of our operating partners could be harmful in the event of system failure.

            We rely heavily on automated systems and technology to operate our business, including flight operations and telecommunications.  Any disruptions in these systems or the systems of our operating partners due to internal failures of technology or external interruptions, such as power outages, could result in the loss of critical data and/or cancellation of flights and have an adverse effect on our results of operations.

            Our operations and financial condition could be adversely affected as a result of an aviation accident.

            An accident or incident involving one of our aircraft could involve repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service, as well as significant potential claims of injured passengers and others.  In the event of an accident, our liability insurance may not be adequate and we may be forced to bear substantial losses from the accident.  Substantial claims resulting from an accident in excess of our related insurance coverage would harm operational and financial results.  Moreover, any aircraft accident or incident could create a public perception that we are less safe or reliable than other airlines.

Item 1B.  Unresolved Staff Comments

            We do not have any unresolved comments from the SEC’s staff as of the date of this filing.

Item 2.  Properties

Flight Equipment

            As shown in the following table, our operating fleet consisted of 244 regional jets as of December 31, 2009.

            All 244 aircraft were placed into service prior to 2007.  During 2009, our remaining 50 options with Embraer for aircraft purchases within the ERJ-145 Family expired unexercised.

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Facilities

            Airports

            We lease all of our airport passenger facilities either directly with the airport authorities or in some cases, through arrangements with Continental, on a net-rental basis.  Our largest operational centers are at Houston’s George Bush Intercontinental Airport, which is approximately 155,000 square feet, with 33 passenger loading bridges and 15 hardstand positions in Terminal B and 4 passenger loading bridges and 7 hardstand positions in Terminal D; Cleveland’s Hopkins International Airport, of which we have approximately 106,000 square feet and 12 passenger loading bridges and 6 hardstand positions in Terminal D; and Newark Liberty International Airport, where we operate out of Continental’s Terminal A with up to 14 passenger loading bridges and 2 hardstand positions.  In addition, at each of Continental's three domestic hubs and many other locations, our passenger and baggage handling space is provided by Continental on varying terms dependent on the prevailing practice at each airport.  If the Amended Continental CPA were terminated, we might be required to vacate the terminal facilities (or all facilities if the termination resulted from our material breach of the agreement) that are subleased to us by Continental, and to use commercially reasonable efforts to transfer to Continental or its designee any lease in our name.  For further discussion of our airport facilities, slots and route authorities, refer to Item 1, Business.   For a period of five years following the termination of the Amended Continental CPA, if we wanted to transfer our interests in any of our facilities used to fulfill our obligations under the agreement, Continental would need to consent to the transfer (where Continental is the sublessor) and has a right of first refusal to acquire our interests in those facilities that we lease from parties other than Continental.

            As of December 31, 2009, we continue to lease approximately 5,000 square feet of terminal space including one gate at the Will Rodgers World Airport in Oklahoma City, Oklahoma; 2,000 square feet of terminal space at the Louisville International Airport in Louisville, Kentucky and 1,668 square feet of terminal space and one gate at the Boise Air Terminal in Boise, Idaho previously associated with our Branded Flying .  Our facilities team has been very aggressive in working to sublease or terminate the leases associated with the remaining Branded Flying lease obligations which expire between June 2010 and December 2010.  All expenses associated with the leases were recorded in our Consolidated Statement of Operations for the year ended December 31, 2008 after Branded Flying operations were suspended.

            Corporate Offices and Other

            Our Houston headquarters building is comprised of executive, administrative and operations control departments, occupying approximately 42,000 square feet of leased space.  We also lease a second building that consists of 18,000 square feet for executive and administrative staff and 50,000 square feet of production and warehouse space utilized by InTech.  To reduce overhead expenses, we moved executive and administrative staff from our second building utilized by InTech to our headquarters building and are working to sublease the space.  Additionally, we lease a 57,000 square foot training center containing numerous simulators, training devices and corresponding training and administrative staff.

            Maintenance Facilities

            In addition to our airport passenger facilities, we currently operate six major maintenance facilities (hangars/shops) in Houston, Cleveland, Newark, Knoxville, Shreveport and Richmond, as well as four satellite line maintenance facilities in other cities.  Additionally, XJT Mexico, Inc., a wholly owned subsidiary of Holdings, owns three buildings consisting of approximately 96,000 square feet of hangar space and 3,000 square feet of administrative space in Saltillo, Mexico that is leased to Saltillo for use in its aircraft painting business.  We are responsible for maintenance, taxes, insurance and other facility-related expenses and services at these facilities.

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Item 3.  Legal Proceedings

            In July 2009, we entered into a settlement agreement related to our auction rate securities (“ARS”) litigation against RBC Capital Markets Corporation et al. (collectively “RBC”) with respect to certain ARS purchased from RBC. Among other terms, the settlement agreement provided for RBC to immediately repurchase ARS with an aggregate par value of $18,000,000 it sold to ExpressJet for 87.5% of par value.  Additionally, if within twelve months of the date of the execution of the settlement agreement, any of the ARS is redeemed or refinanced by its issuer and RBC is paid a sum representing greater than 87.5% of the par value of that ARS, we are to be paid a sum representing the difference between (1) 87.5% of the par value of that ARS and (2) the sum actually received by RBC.  As part of the settlement agreement, we dismissed our lawsuit against RBC and released claims related to RBC’s sale of the ARS to us.

            In September 2009, we initiated litigation against Bank of America Corporation et al. (“BOA”) related to ARS that BOA sold to ExpressJet in January 2008.  During the fourth quarter of 2009, we consummated four separate transactions pursuant to which we sold $5.0 million of ARS purchased from BOA for 90.5% of the face value of the securities, $10.0 million of ARS purchased from BOA for 90.0% of the face value of the securities and $4.95 million of ARS purchased from BOA for 93.0% of the face value of the securities.  As of December 31, 2009, the aggregate par value of our remaining ARS holdings purchased from BOA was $1.1 million.

            In October 2009, we finalized an agreement with Flight Services and Systems, Inc. (“FSS”) pursuant to which, among other things, FSS repurchased our 44% interest and each party granted the other a mutual release of all present and future claims against the other.  The purchase price received from FSS consisted of $1.0 million and a promissory note in the amount of $600,000, which note is payable in sixty (60) equal monthly installments of principal plus interest.  The first payment was received in December 2009.  Our investment in FSS totaled $1.2 million immediately prior to this agreement.

            We are a defendant in various lawsuits arising in the ordinary course of our business.  While the outcome of these lawsuits and proceedings cannot be predicted with certainty and could have a material adverse effect on our financial position, results of operations or cash flows, we believe that the ultimate disposition of these suits will not have a material adverse effect on our financial position, results of operations or cash flows.

Environmental Proceedings

            We are and may from time to time become involved in environmental matters, including the investigation and/or remediation of environmental conditions at properties we use or were previously used by us.  We are not, however, currently subject to any environmental cleanup orders imposed by regulatory authorities, nor do we have any active investigations or remediation at this time.

Item 4.  Submission of Matters to a Vote of Security Holders

            None.

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PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

            Our common stock trades on the NYSE under the symbol “XJT”.  The table below shows the high and low sales prices for our common stock as reported on the NYSE’s composite tape for the periods indicated.

            Effective as of October 2, 2008, every 10 shares of our common stock was combined into one share of common stock through a reverse stock split (the “Reverse Split”).  The Reverse Split affected all shares of common stock and stock options of the Company outstanding immediately prior to the effective time of the reverse stock split.  The following table reflects Reverse Split adjusted stock prices for periods prior to October 2, 2008:

            As of February 26, 2010, there were 160 holders of record of our common stock.

            We have not paid any cash dividends on our common stock and have no current intention of doing so.

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Performance Graph

            The following graph compares the cumulative total return on our common stock with the cumulative total returns (assuming reinvestment of dividends) of the American Stock Exchange Airline Industry Index, the Russell 2000 Index and the NYSE Composite Index as if $100 were invested in our commson stock and each of those indices on December 31, 2004:

			12/31/04			12/31/05			12/30/06			12/29/07			12/31/08		12/31/09
ExpressJet Holdings, Inc. (1)		$	100.00		$	62.81		$	62.89		$	19.25		$	1.32	$	3.74
American Stock Exchange Airline Industry   Index			100.00			90.60			97.02			57.09			40.38		56.26
Russell 2000 Index			100.00			103.32			120.89			117.57			76.65		95.98
NYSE Composite Index (2)			100.00			106.95			126.05			134.35			79.41		99.10

	(1)	Prices for ExpressJet are on a post Reverse Split basis and reflect the prices of the consolidated tape of all trading platforms where XJT traded during the period we were subject to the sub-penny halt rule and not trading on the floor of the NYSE.
	(2)	The NYSE Composite Index is designed to measure the performance of all common stocks listed on the NYSE, including Advanced Drawing Rights, Real Estate Investment Trusts and tracking stocks.  In January 2003 the NYSE reintroduced the NYSE Composite Index under a new methodology that is fully transparent and rule-based.  Under the new methodology, all closed-end funds, Electronic Trading Funds, limited partnerships and derivatives are excluded from the index.

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            Our certificate of incorporation provides that no shares of capital stock may be voted by or at the direction of persons who are not United States citizens unless they are registered on a separate stock record.  Our bylaws further provide that no shares will be registered on this foreign stock record if the amount to be registered would exceed United States foreign ownership restrictions.  United States law currently limits the voting power in us (or any other U.S. airline) by persons who are not citizens of the United States to 25%.

Issuer Purchases of Equity Securities

Period		(a) Total number of shares purchased (1)			(b) Average price paid per share			(c) Total number of shares purchased as part of publicly announced program (2)			(d) Maximum value of shares / notes that may yet be purchased under the program (in millions) (3)
Jan 2009		51,044		$	1.78			51,014		$	10.1
Feb 2009		43,540			1.13			43,531			10.1
Mar 2009		2,550,781			1.07			2,550,437			6.1
Apr 2009		8,438			1.12			8,415			6.1
May 2009		390,063			1.32			386,300			5.5
Jun 2009		4			1.38			—			5.5
Jul 2009		(3	)		1.59			—			5.5
Aug 2009		20			1.56			—			10.0
Sep 2009		75			2.78			—			9.7
Oct 2009		16			2.47			—			9.7
Nov 2009		—			—			—			9.7
Dec 2009		15			3.65			—			9.7
Total		3,043,993		$	1.11			3,039,697		$	9.7

	(1)	Shares shown include shares of our common stock repurchased within our Board approved securities repurchase program as well as shares withheld to satisfy individual employee tax obligations arising upon the vesting of restricted stock awards.  Shares withheld to satisfy tax obligations do not count against our securities repurchase program.
	(2)	Amounts shown relate only to shares of our common stock repurchased within our Board approved securities repurchase program.
	(3)	Amounts shown reflect repurchases of our common stock, repurchases of our Original 4.25% Convertible Notes due 2023 and repurchases of our 11.25% Convertible Secured Notes due 2023 included within our Board approved securities repurchase program.

            In July 2005, our Board of Directors authorized the expenditure of up to $30 million to repurchase shares of our common stock.  In February 2006, the Board authorized the inclusion of our Original 4.25% Convertible Notes due 2023 (now our 11.25% Convertible Secured Notes due 2023), within the previously announced program.  Our Board authorized an additional $15 million in 2008 and $10 million in 2009 to be utilized for purchases within this program.  Repurchases have been made from time to time in the open market and in privately negotiated transactions; the timing of any repurchases under the program depends on a variety of factors, including market conditions, and may be suspended or discontinued at any time.

            In 2009, we repurchased 3.0 million shares of our common stock and $8.7 million par value of our 11.25% Convertible Secured Notes due 2023.  As of December 31, 2009, a balance of $9.7 million remained in the program for additional repurchases.

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Item 6.  Selected Financial Data

            This selected financial data should be read together with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report.

            In 2009, ExpressJet continued to transition its business by focusing on contractual flying arrangements.  In addition, we placed emphasis on improving our balance sheet in light of the pressures of industry-wide capacity reductions and continued difficulties in the global economy.  These efforts included the repurchase of $8.7 million of our 11.25% Convertible Secured Notes due 2023 in the open market, which reduced the outstanding principal balance of our convertible notes from $60.8 million as of December 31, 2008 to $52.1 million as of December 31, 2009.  We also repurchased 3.0 million shares of our common stock in 2009.  In late 2009, we began to reallocate aircraft within our fleet to immediately support existing capacity needs of United under the United Express Agreement.  Additionally, revenues increased over 40% in 2009 within our Corporate Aviation (charter) division.

            The following selected financial data, excluding operating statistics, have been derived from our audited financial statements.  The financial information included in this report is not necessarily indicative of our future results of operations, financial position and cash flows.  For a discussion of some of the key factors that could have an adverse effect on our results of operations, financial position and cash flows, refer to Item 1A, Risk Factors .

            As discussed in Note 1, “Adjustments and Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements , our Consolidated Financial Statements for each period presented have been adjusted for the retrospective application of the Cash Conversion Subsections of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20, “Debt with Conversion and Other Options – Cash Conversion” (“Debt with Conversion Options Subtopic”).

		Year Ended December 31,
		2009				2008 (6)				2007 (6)				2006				2005
		(In thousands, except per share data) (Reverse Split adjusted)
Statement of Operations Data:
Operating revenue (2), (5)	$	688,258			$	1,318,213			$	1,685,545			$	1,682,156			$	1,562,818
Operating expenses (2), (3)		735,442				1,434,668				1,792,416				1,541,085				1,406,275
Operating income (loss)		(47,184	)			(116,455	)			(106,871	)			141,071				156,543
Non-operating income (expense), net (4)		(9,185	)			18,882				(10,292	)			(4,379	)			(10,837	)
Net income (loss) (7)		(3,306	)			(95,058	)			(76,241	)			86,511				92,706
Basic earnings (loss) per share (1)		(0.21	)			(8.44	)			(14.20	)			16.06				17.13
Diluted earnings (loss) per share (1)		(0.21	)			(8.44	)			(14.20	)			15.65				16.48
Weighted average number of shares used   in computations:
Basic (1)		15,398				11,265				5,369				5,386				5,412
Diluted (1)		15,398				11,265				5,369				6,153				6,172

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	(1)	Refer to Note 10, “Earnings / (Loss) Per Share,” in Notes to Consolidated Financial Statements for the reconciliation of the numerator and denominator of basic earnings per share (“Basic EPS”) to the numerator and denominator of diluted earnings per share (“Diluted EPS”) for the years ended December 31, 2009, 2008, and 2007. Shares and per share data figures for 2007, 2006, and 2005 have been adjusted to reflect the Reverse Split that occurred in 2008.
	(2)	Our operating revenue and operating expenses for 2008, 2007 and 2006 include reclassifications between operating expense line items and between operating revenue and operating expenses.  These reclassifications were not material to previous years.
	(3)	Our operating expenses for 2009 include impairment of fixed assets of $1.3 million.  The operating expenses for 2008 include impairment of fixed assets and goodwill of $20.8 million and special charges of $22.4 million.
	(4)	Non-operating income (expense), net includes amortization of debt discount of $4.9 million in 2009 and $10.5 million in 2008; gains of $29.9 million from extinguishment of debt in 2008; settlement of fuel contracts of $23.1 million in 2008; and impairment charges on investments totaling $21.5 million in 2008.
	(5)	Reimbursable costs under the Amended Continental CPA are recorded to revenue.  The reimbursable expenses are different under the terms of the Amended Continental CPA versus the Original Continental CPA, and therefore revenues are inconsistent with prior periods, beginning July 2008.
	(6)	In April 2007, we launched our Branded Flying operation which resulted in our being at-risk for all expenses, including fuel and marketing expenses.  These operations were suspended in September 2008.
	(7)	In 2009 we recorded an income tax benefit of $53.1 million, including a $17.1 million income tax refund receivable associated with recent tax legislation, resulting in a diminished loss for 2009.

		As of December 31,
		2009			2008			2007			2006			2005
		(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term   investments (including restricted cash)	$	107,800		$	119,357		$	214,279		$	302,860		$	236,503
Amounts due from Continental, net		—			—			—			—			4,832
Total assets		360,458			388,889			597,608			637,029			560,270
Amounts due to Continental, net		1,687			1,539			4,726			3,522			—
Note payable to Continental		—			—			—			—			17,545
Other long-term debt and capital lease   obligations, including current maturities (1)		44,425			49,061			140,605			134,318			126,138
Stockholders' equity		196,130			197,683			236,837			315,724			225,974

(1)

Subsequent to August 1, 2008, our 11.25% Convertible Secured Notes due 2023 were reclassified from current liabilities to long-term liabilities as Holders of this debt have the right to require that we repurchase their notes on August 1, 2011, 2013 and 2018.  For further details related to our 11.25% Convertible Secured Notes due 2023, refer to Note 7, “Long-term Debt” in Notes to Consolidated Financial Statements .

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		Year Ended December 31,
		2009			2008			2007			2006			2005
Operating Statistics:
Revenue passenger miles (millions) (1)		8,033			9,564			10,071			10,297			8,938
Available seat miles (millions) (2)		10,449			12,606			13,575			13,200			11,973
Passenger load factor (3)		76.9	%		75.9	%		74.2	%		78.0	%		74.7	%
Operating cost per available seat mile (cents) (4)		7.03			11.38			13.20			11.67			11.75
Block hours (5)		677,293			828,840			916,756			916,718			827,369
Operating cost per block hour (dollars) (6)		1,085			1,731			1,956			1,681			1,700
Departures		363,758			433,289			489,489			491,598			449,928
Average price per gallon of fuel, including fuel   taxes (dollars) (7)		2.43			1.32			1.00			0.71			0.71
Fuel gallons consumed (millions) (7)		5.5			172.9			323.2			319.1			295.5
Average length of aircraft flight (miles)		576			594			569			549			545
Average daily utilization of each aircraft (hours) (8)		7.60			8.50			9.17			9.24			8.87
Completion factor		98.2	%		97.4	%		97.6	%		97.9	%		97.7	%
Revenue passengers (thousands)		13,464			15,629			17,365			18,173			16,076
Actual aircraft in fleet at end of period		244			244			274			274			266

	(1)	Revenue passenger miles are the number of scheduled miles flown by revenue passengers.
	(2)	Available seat miles are the number of passenger seats available multiplied by the number of scheduled miles those seats are flown.
	(3)	Passenger load factor equals revenue passenger miles divided by available seat miles.
	(4)	Operating cost per available seat mile is operating costs divided by available seat miles.  The reimbursable expenses are different under the terms of the Amended Continental CPA versus the Original Continental CPA, and therefore costs are inconsistent with prior periods, beginning July 2008.
	(5)	Block hours are the hours from gate departure to gate arrival.
	(6)	Operating cost per block hour is operating costs divided by block hours.
	(7)	Beginning in 2007, our fuel activity includes purchases to support our various business platforms outside of the Amended Continental CPA.  These purchases were executed through agreements with independent third parties.  Under the Amended Continental CPA, Continental is directly responsible for the cost of providing fuel for all flights operating as Continental Express; therefore, the related fuel expense is no longer included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.  Prior to July 1, 2008 under our fuel purchase agreement with Continental, fuel and fuel tax expense were reconciled to the lower of the actual costs or the agreed-upon caps.  From 2003 through July 1, 2008, our caps on fuel and fuel taxes, for aircraft operating under the Original Continental CPA, were 66.0 cents and 5.2 cents per gallon, respectively.
	(8)	Average daily utilization of each aircraft is the average number of block hours per day that an aircraft in revenue service is operated.

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Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

            The information contained in this section has been derived from, is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto contained in “Financial Statements and Supplementary Data” of this report.  This section contains forward-looking statements that involve risks and uncertainties.  Our actual results may differ materially from those expressed or implied in these forward-looking statements as a result of various factors, including those described in “Forward-Looking Statements” and in Item 1A, Risk Factors .

Overview

            The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our operations and our current business environment.  MD&A is provided as a supplement to — and should be read in conjunction with — our Consolidated Financial Statements and the accompanying notes thereto contained in “Financial Statements and Supplementary Data" of this report. This overview summarizes MD&A, which includes the following sections:

	•	Our Business — a general description of our business, including our business segments; our objective; focus areas; and challenges and risks of our business.
	•	Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates.
	•	Operations Review — an analysis of our consolidated results of operations, including appropriate segment disclosures, for the three years presented in our Consolidated Financial Statements.
	•	Liquidity, Capital Resources and Financial Position — an analysis of cash flows; off–balance sheet arrangements and aggregate contractual obligations; an overview of financial position; and the impact of inflation and changing prices.

Our Business

            We are one of the largest regional airlines in the world.  We currently operate 244 Embraer regional jets and have over 5,600 employees.  We have three primary categories of operations:

	•	Scheduled regional airline service for mainline partners;
	•	Dedicated charter operations; and
	•	Third-party aviation services provider of airport ground handling, aircraft maintenance, aircraft refurbishment (interiors and paint) work and aircraft cleaning.

            Our main business focuses on providing regional airline service that feeds passengers to our partner’s hub airports.  Due to the fact that our service is provided under our partner’s brand name, the ExpressJet brand is relatively unknown to the public.  During 2009, our primary partner was Continental, a member of the Star Alliance.  We are an integral part of Continental’s network, bringing customers to and from its hubs in Houston, Newark and Cleveland who connect to or from their flights.  As a result of the low cost per trip for 50-seat regional jets when compared to alternative aircraft, ExpressJet is able to bring jet service to many areas that would not otherwise have air service.  These smaller communities gain non-stop air service to partner hubs along with connections to worldwide destinations from the hubs that ExpressJet feeds.  During 2009, we completed 349,733 departures as Continental Express under the Amended Continental CPA.  In November 2009, we added a second long-term partner when United, another member of the Star Alliance, announced a multi-year arrangement with us for 22 aircraft flying as United Express pursuant to the United Express Agreement.  The agreement will have an initial term of three years for 11 aircraft and two years for the remaining 11 aircraft, and will have a renewal option, at United’s election, for additional periods up to a total term of five years.  From an industry perspective during 2009, we were the third largest regional airline based on passengers enplaned behind only American Eagle and SkyWest.

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            We operated a total of six aircraft under the United Express Agreement as of December 31, 2009 and a total of 16 aircraft under the United Express Agreement as of February 17, 2010.  The remaining six long-term aircraft will begin operating under the United Express Agreement on March 1, 2010.

            From May 2010 through December 2010, we will fly up to ten additional aircraft on a short-term basis for United Express in the current ExpressJet livery.  United will have the option to renew the operation of these aircraft for up to four additional periods of not less than thirty days per renewal period.  United must notify us of its intention to renew for the initial renewal period no later than June 15, 2010 for the first six supplemental aircraft and August 15, 2010 for the remaining four additional aircraft.  We have also agreed to a framework that would allow United to extend the renewal notice deadline for each aircraft upon certain terms and conditions. 

            Under the United Express Agreement, we expect the following monthly fleet plan for United Express for the first half of 2010.

Month		Aircraft Added		Total Operating as United Express
February		6		16
March		6		22
April		—		22
May		10		32
June		—		32

            If the renewal option is not exercised, the ten aircraft will be removed from service and placed into the Corporate Aviation (charter) operation as follows:

Renewal Date		Potential Aircraft Removed		Remaining Total Operating as United Express
October 15		3		29
November 15		3		26
December 15		4		22

            In 2010, our continued exceptional performance will be a key to our success.  Historically, we perform at or near the top of the rankings for fewest carrier caused delays or cancellations as measured by the DOT.  An industry-leading performance for this metric is key for two reasons:

	•	Our mainline partners, Continental and United, depend on us to provide exceptionally reliable operations to complement their brand by providing seamless customer service, evidenced by few customer complaints and passenger survey scores; and
	•	We are paid on a per block hour basis by our mainline partners.  If the flight does not operate, we do not earn revenue.

            We have been a leader in reliability within the airline industry regarding carrier-caused delays since we became a DOT reporting carrier in 2002.

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            In addition to providing regional airline service for legacy carriers, we operate one of the world’s largest dedicated charter passenger fleets through our Corporate Aviation (charter) division.  A core advantage of this fleet of aircraft is the highly competitive lease rates as provided to us under the Amended Continental CPA.  In 2009, we operated a dedicated charter fleet of 30 aircraft in our Corporate Aviation (charter) division.  In 2010, the number of aircraft in this division will fluctuate between six aircraft and 16 aircraft, depending on the number of aircraft needed to support flying for United under the United Express Agreement.  With a near-perfect operational record, we spent 2009 focusing on improving the margins associated with these operations.  We expect these efforts, coupled with a smaller number of aircraft dedicated to our Corporate Aviation (charter) division in 2010, should improve our returns in this line of business.

            Our fleet of 244 aircraft is planned to be allocated as follows during 2010:

	•	206 aircraft operating for Continental as Continental Express pursuant to the Amended Continental CPA;
	•	22 aircraft operating for United as United Express pursuant to the United Express Agreement, increasing to as many as 32 aircraft from May 2010 to December 2010; and
	•	16 aircraft operating in our Corporate Aviation (charter) division, decreasing to as few as six aircraft from May 2010 to December 2010.

            Finally, we operate several non-flying businesses or third-party aviation services, including ground handling and aircraft cleaning operations, an aircraft paint facility in Mexico and an aircraft interiors shop in Houston.  We operate each of these businesses under ExpressJet Services.  In addition to offering these services to our partners and other industry participants, we also use these services as a vehicle to diversify our revenue streams and control costs associated with our flying operations.  For example, each of the aircraft utilized under the United Express Agreement will be painted at our aircraft paint facility.

            Prior to 2009, we experienced numerous challenges that caused us to transition our business to the three operations described above.  These challenges and our responses include:

	•	Record high fuel prices – we suspended Branded Flying and elected to more tightly align with Continental under the Amended Continental CPA, which permitted Continental to better weather the crippling effect of high fuel costs;
	•	Highly leveraged balance sheet – we reduced debt through our Exchange Offer and our securities repurchase program;
	•	Non-diversified revenue stream – we enlarged the fleet within our Corporate Aviation (charter) division and began reaching out to other legacy carriers to solicit flying opportunities (which led to our summertime flying with United during 2009); and
	•	Declining revenues due to the Amended Continental CPA – we focused on reducing expenses, including obtaining labor concessions.

            In 2009, we worked to complete our transition, weather the worldwide economic recession and take advantage of strategic opportunities to increase aircraft productivity, while also continuing to improve our balance sheet.  The financial and operational highlights for 2009 are as follows:

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Full Year 2009 Financial Highlights

	•	Improved our operating cash flow used in operating activities by approximately $44 million;
	•	Reduced expenses by 48.7% (versus full year 2008) due to the Amended Continental CPA and suspension of non-profitable branded flying operations;
	•	Claimed and recorded a $17.1 million tax refund from the Internal Revenue Service allowed under the "Worker, Homeownership, and Business Assistance Act of 2009" that permitted Holdings to elect to carry back its 2008 net operating loss five years;
	•	Allocated an additional $10 million to our securities repurchase program – purchasing our outstanding 11.25% Convertible Secured Notes due 2023 at discounted prices to par value at the time of purchase;
	•	Sold $32.3 million of our ARS holdings through settlements and sales in the open market;
	•	Incentivized Continental to increase our utilization during fourth quarter 2009 by providing a discount at certain utilization above target levels;
	•	Experienced increased wage pressure due to the seniority of our workforce and a significant decrease in employee attrition;
	•	Adjusted the block hour revenue rate we earn from Continental by 2% versus historical rates of between 3% to 4%; and
	•	Grew Corporate Aviation (charter) revenue to $56.7 million, an over 40% increase from 2008.

Full Year 2009 Operational Highlights

	•	Continued to fly at low utilization levels during most of the year due to decreased demand;
	•	Completed 99.9 percent of our 367,808 scheduled flights during the year for items we could control (maintenance, crews and scheduling) and operated 98.2 percent of all scheduled flights considering all cancellation types;
	•	Added United as a new long-term partner;
	•	Maintained near-perfect operations in the Corporate Aviation (charter) division for 2009; and
	•	Finished the year servicing 42 contracts at 30 stations within our aviation services division and added a new type of contract in December 2009 – aircraft cleaning.

            Liquidity

            With the challenges facing our company, the airline industry as a whole and the global economic recession, we believe the managing costs and cash preservation are crucial to sustain our liquidity and meet our financial obligations throughout 2010.  Achieving these initiatives is essential at this time to maintain an appropriate operating margin and to preserve our cash.  These include, individually or in combination, if required:

	•	Collaborating with third-party vendors to manage supply costs;
	•	Managing working capital effectively (i.e., accounts payable, accounts receivable, and inventory);
	•	Selling our remaining ARS holdings;
	•	Selling nonstrategic or surplus assets; and
	•	Managing capital expenditures to only those required by law or operational necessities.

            We believe that our existing liquidity and projected 2010 cash flows, including the incremental sources of liquidity described above will be sufficient to fund current operations and our financial obligations through December 31, 2010.  However, as noted in Item 1A. Risk Factors within this report, factors outside of our control may dictate that we alter our current plans and expectations and could have a material adverse impact on our ability to sustain operations over the long term.

            See further discussion of our liquidity below in the “Liquidity, Capital Resources and Financial Position” section.

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            Our Business Segments

            For the year ended December 31, 2009, ExpressJet had two reportable segments which are the basis of our internal financial reporting:  Contract Flying and Aviation Services.

            Contract Flying includes flying conducted in our Corporate Aviation (charter) division, under the Amended Continental CPA and under the United Express Agreement.  Under Contract Flying, revenues are contractually determined, eliminating our exposure to fluctuations in fuel prices, fare competition and passenger volumes.  Under these arrangements, our partners bear the revenue risk and cost of marketing and distribution on our aircraft while we are responsible for the operation and maintenance of the aircraft.

            Aviation Services includes our ground-handling services pursuant to contracts with Continental and other airlines at airport locations across the United States, as well as those performed by ExpressJet Services.  Under ExpressJet Services’ brand, we paint aircraft and repair composite structures, aircraft interiors (including refurbishment of seats, galleys, lavatories and panels) and thrust reversers throughout our four facilities in the United States and Mexico.

            Our Objective

            Our goal is to return to profitability by efficiently utilizing our assets and through a strong commitment by our management and employees.  Our plans for returning to profitability include:

	•	Delivering the best products and services to a diversified base of customers.
	•	Assisting our partners in development of winning networks, and creating ways to expand these relationships.
	•	Being a great place to work where people are encouraged to achieve their best performance.

            Contract Flying – Amended Continental CPA

            A significant portion of our revenue and cash flows is attributable to the Amended Continental CPA.  Under the Amended Continental CPA, Airlines operates flights on behalf of Continental as Continental Express.  For a detailed discussion of the Amended Continental CPA, refer to Note 2, “Contract Flying,” in Notes to Consolidated Financial Statements.

            Contract Flying – United Express Agreement

            In February 2010, we entered into the United Express Agreement with United to fly 22 ERJ-145 aircraft as United Express beginning December 1, 2009.  The United Express Agreement has an initial term expiring on April 30, 2012 for 11 aircraft and on April 30, 2013 for the remaining 11 aircraft, and contains a renewal option, at United’s election, for additional periods up to a total term of five years.  Under this arrangement, United must notify ExpressJet of its intention to renew each group of aircraft not less than six month’s prior to the end of the term for such aircraft.  Additionally in February 2010, we entered into the First Amendment to the United Express Agreement with United, pursuant to which we will fly up to ten additional aircraft for United in the current ExpressJet livery from May 2010 through December 2010.    United will have the option to renew these supplemental aircraft for up to four additional periods of not less than thirty days per renewal period.  Under this arrangement, United must notify ExpressJet of its intention to renew for the initial renewal period no later than June 15, 2010 for the first six supplemental aircraft and August 15, 2010 for the remaining four additional aircraft.  In an effort to provide United with increased flexibility, the amendment allows United to extend the renewal deadline for each aircraft upon certain terms and conditions.  If United elects not to extend the term of the supplemental aircraft, the ten aircraft will be removed from service, and placed into the Corporate Aviation (charter) operation.  For a detailed discussion of the United Express Agreement, refer to Item 1, Business.

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            Contract Flying – Corporate Aviation

            Towards the end of 2008, we expanded our Corporate Aviation (charter) division to 30 aircraft.  In 2009, these aircraft were subject to long-term agreements and other ad-hoc charter service arrangements.  Our Corporate Aviation (charter) division continues to focus on corporate shuttles, entertainment / sports, and government businesses.  Certain Corporate Aviation (charter) customers typically provide deposits for flights based on a percentage of estimated charges to be incurred.  These prepayments are held in escrow and recorded as restricted cash and deferred revenue until the flights are completed.  At that time we recognize the associated revenue and release the funds from escrow into our cash account.

            The aircraft in the Corporate Aviation (charter) division are flown under Airlines’ operating certificate issued by the FAA.

            All of our seats for these aircraft are leather, memory foam cushioned seats and include XM Satellite Radio with over 100 channels of audio entertainment.  In addition to our basic amenities (such as providing blankets to each passenger and standard catering) customized flight service options give customers an opportunity to create a unique flight experience.

            Aviation Services

            Aviation Services includes our ground-handling services pursuant to our contracts with Continental and other airlines at airport locations across the United States, as well as ExpressJet Services.  We will continue to leverage our operational expertise developed from this business segment to cost-effectively serve our current customers and attract new customers.  Need to add in aircraft cleaning contract.

            Our 2010 Outlook

            The International Air Transport Association (“IATA”) reported December and full-year 2009 demand statistics for international scheduled air traffic that showed the industry ending 2009 with the largest ever post-war decline. Passenger demand for the full year was down 3.5% with an average load factor of 75.6%.  IATA predicted that the airline industry permanently lost 2.5 years of growth in passenger markets and that revenue improvements will be at a much slower pace than the demand growth.

            Seasonally adjusted demand figures for December compared to November 2009 indicate a 1.6% rise in passenger traffic.

            December 2009 passenger demand recorded a 4.5% improvement compared to December 2008, with a load factor of 77.6%.  While this is an 8.4% demand improvement from the February 2009 low point, it is still 3.4 points below the early 2008 peak.

            The economic recovery and continued improvement in passenger demand, as described above by IATA, will be a key to our success during 2010.  United currently is projecting a more aggressive use of regional jets, so adding this flying during 2010 should help increase the productivity and utilization of our aircraft to pre-recessionary levels.

            Continental and United each provide investor updates regularly and discuss their capacity guidance and are the best resource for capacity expectations.  On January 21, 2010, Continental published an investor update and indicated regional capacity expectations to decline 0.2% for 2010.  Despite lower capacity guidance, we believe that we should be more productive on a per aircraft basis as we will operate eight fewer planes (206 versus 214) under this agreement in 2010.  On January 27, 2010, United published their investor update and indicated 6.3% - 7.3% regional affiliate capacity growth.  Both of these estimates are based on available seat miles.

            We believe that additional opportunities may present themselves during the year as Continental continues to develop its network within the Star Alliance, of which United is a long-standing member.

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            Given the expected economic environment described above, our focus this year will be generating positive cash flows from operations and ultimately returning to overall profitability.  While we do not believe full-year profitability can be achieved in 2010, improvements in the macro economy combined with the elements below can lead to sustained profitability.  These elements include:

	•	Increased utilization under the Amended Continental CPA and through the addition of United Express flying.
	•	Controlled spending and expense management.
	•	Continued industry-leading performance as a reliable operator.
	•	Improved productivity and financial performance in our charter operations and aviation services business.

            With the execution of the United Express Agreement, we expect full-year block hours to increase between 10% and 15% in 2010.  We expect to achieve run-rate economics during the third quarter of 2010 after all aircraft are in place and start-up costs, including paint, interior modifications and aircraft positioning, are complete.

            Future Costs

            We remain committed to providing competitively priced services by controlling our costs; however, we believe that our costs are likely to increase in the future due to:

	•	transition costs associated with refurbishing and repainting aircraft for United;
	•	changes in wages, salaries and related fringe benefit costs, including changes to our self-insured medical and workers compensation costs;
	•	requirements under our collective bargaining agreements;
	•	aging of our fleet, resulting in higher aircraft maintenance costs;
	•	changes in the costs of materials and outside services, including our information technology costs;
	•	changes in governmental regulations, such as costs associated with extended tarmac delays, war risk insurance or costs attributed to heightened security requirements; and
	•	financing costs in order to satisfy any operating and/or financial obligations.

            In the long term, failure to control our costs would prevent us from remaining competitive and reduce our ability to limit losses including the opportunities to attract additional corporate customers or to survive a prolonged economic downturn.

Critical Accounting Policies and Estimates

            Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) .  The preparation of these financial statements requires us to make estimates and judgments that affect reported amounts and related disclosures.  We have identified the accounting policies and estimates below as critical to our business operations and understanding of our results of operations.  The SEC has defined critical accounting policies and estimates as the ones that are most important to the presentation of a Company’s financial condition and results and require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.  For all of these estimates, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require judgment.  The discussion below is not intended to be a comprehensive list of our accounting estimates and policies.  For a detailed discussion on the application of our accounting policies, refer to Note 1, “Adjustments and Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements.

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            Effective July 1, 2009, the FASB ASC became the exclusive authoritative reference for non-governmental GAAP in the United States.  The ASC became the only level of authoritative GAAP and eliminated the previous four-level hierarchy.  Our accounting policies were not affected by the conversion to ASC.  However, references to specific accounting standards in the footnotes to our Consolidated Financial Statements have been changed to refer to the appropriate section of ASC.

Description	Judgments and Uncertainties	Effect if Actual Results Differ from Assumptions
Revenue Recognition Contract Revenues.  We recognize our operating revenue under contractual arrangements, such as the Amended Continental CPA and certain long-term Corporate Aviation agreements, pursuant to the terms of the contracts.  Operating revenues from these contracts have been classified as passenger revenue.  Under the Amended Continental CPA, we derive our revenue based on fixed block hour rates multiplied by the block hours flown for the period thereby reducing or eliminating the risk of misinterpretation of the agreement.	Revenue Recognition Contract Revenues.   We recognize as revenue compensation received from Continental for reimbursement of certain trued-up costs, when agreed to by the parties, as such amounts may be subject to contract interpretation.	Revenue Recognition Contract Revenues.   After a mutually agreed upon application has been reached, our methodology used to record revenue as related to true-up costs, substantially reduces the need for estimates and assumptions.  We applied this methodology consistently throughout 2009 and we do not expect any material changes to that methodology going forward.
Spare Parts and Supplies Inventories, expendable parts and supplies relating to flight equipment are carried at average acquisition cost and are expensed when used.  Inventories are carried at the lower of amortized cost or net realizable value.  The adequacy of our allowance for obsolescence requires a high degree of judgment.	Spare Parts and Supplies Our allowance for obsolescence related to inventory is provided over the remaining useful life of the related aircraft, plus allowance for spare parts currently identified as excess.  Part of the calculation for this reserve is based on historical experience.  In addition, we may reserve for additional obsolescence when current available market data indicate a decline in the fair value of parts or if we deem parts as excess inventory.	Spare Parts and Supplies As of December 31, 2009, our allowance for obsolescence related to our spare parts and supplies was approximately $14.4 million.

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Fair Value Measurements Cash and Short-term Investments.  ASC Topic 820, “Fair Value Measurement and Disclosures ” (“ASC Topic 820”) provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market based inputs over entity-specific inputs.  ASC Topic 820 also establishes a three-level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date.  As of December 31, 2009 we held cash equivalents and short-term investments in ARS that were required to be measured at fair value.  We determine the fair value of our cash equivalents and ARS using inputs which are unobservable and significant to the fair value measurement such as the timing of expected future cash flows, underlying collateralization, creditworthiness of the counterparties, and a discount rate that accounts for relevant market conditions.  In addition, in April 2009 the FASB issued new guidance which modified the requirements for recognizing other-than-temporary-impaired debt securities.  As such, any declines in fair value are evaluated against this new standard to determine if the declines are other-than-temporary.	Fair Value Measurements Cash and Short-term Investments.  We determine the fair value of our ARS using a discounted cash flow model and significant unobservable inputs.  Our model contains uncertainties because it requires management to make assumptions and to apply judgment to estimate discount rates, anticipated maturity, industry and economic factors and other key metrics.	Fair Value Measurements Cash and Short-term Investments We consistently applied the fair value approach to our ARS throughout 2009 and recorded other-than-temporary losses of $0.1 million as “Impairment charges on investments” in our Consolidated Statement of Operations.  Recoveries in fair value of $0.7 million were credited to other comprehensive income on our Consolidated Balance Sheets in 2009.
Convertible Secured Notes As referred to in Note 1, “Adjustments and Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements , our convertible notes have been accounted for pursuant to the Debt with Conversion Options Subtopic in which the liability and equity components are separately accounted for to reflect an estimated effective interest rate as if the debt instrument had been issued on a standalone basis.   This resulting discount is amortized over the expected term of our Convertible Secured Notes or through 2011.  Any gains or losses upon extinguishment or derecognition are recorded in the period they occur.	Convertible Secured Notes We determine the estimated value of the liability component based on market information for standalone debt instruments which is subject to significant judgment due to the current credit crisis.	Convertible Secured Notes In 2009, we repurchased $8.7 million par value of our 11.25% Convertible Secured Notes due 2023 which resulted in gains on extinguishment of debt of $1.0 million within the scope of the Debt with Conversion Options Subtopic.  Such gains were calculated as the difference between the fair value of the liability component immediately prior to extinguishment and its book value.

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Long-Lived Assets Long-lived assets, primarily consisting of investments in other entities and flight and ground equipment assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset’s estimated future undiscounted cash flows.  If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss.  The impairment loss calculation compares the carrying value of the asset to the assets estimated fair value.  We recognize an impairment loss if the amount of the assets carrying value exceeds the assets estimated fair value.  If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis and, if applicable, will be depreciated over the remaining useful life of that asset.	Long-Lived Assets Our impairment loss calculations contain uncertainties as they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values.	Long-Lived Assets We have consistently applied our impairment loss methodology.   As a result of our impairment tests in 2009 we recorded impairment charges of $1.3 million to write the long-lived assets to their estimated fair values.  The assets impaired were determined to have no value so no portion of the impairment charge will result in future cash expenditures.
Income Taxes We record a valuation allowance against our deferred tax assets when we conclude it is more likely than not that we will be unable to generate adequate taxable income of the appropriate character, to utilize such assets.	Income Taxes This determination requires management to make judgments regarding expectations of future taxable income.  The Section 382 limitation may impact payments due or refundable under the tax agreement with Continental because the certain deductions that are limited under Section 382 are the same tax attributes that drive our payment obligations under the tax agreement.	Income Taxes In 2009 we determined that is was more likely than not that we would not be able to realize approximately $280 million of our gross deferred tax assets.  Consequently, we adjusted those assets to their net realizable values as of December 31, 2009.  The offset was recorded as a reduction to the valuation allowance of our deferred tax assets and liabilities.  In addition, we also adjusted the valuation allowance by $17.1 million relating to a carryback claim with the Internal Revenue Service that we expect to receive in 2010.

            In addition to our critical accounting estimates and policies described above, we made other estimates that, while not involving the same degree of judgment, are important to understanding our financial statements.  In general, we base our estimates on historical experience, information from third-party professionals and various other assumptions that we believe are reasonable under the circumstances.  We continually evaluate our accounting policies and the estimates used to prepare our Consolidated Financial Statements.  Our estimates as of the date of the financial statements reflect our best judgment after giving consideration to all currently available facts and circumstances.  As such, actual results may differ significantly from these estimates and may require adjustment in the future as additional facts become known or as circumstances change.

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            We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Committee has reviewed the disclosures presented above.

Operations Review

            Under the terms of the Amended Continental CPA, we are not reimbursed for certain costs, primarily fuel, aircraft rent and certain ground handling services, which were previously recorded as revenue.  Accordingly revenues from July 1, 2008 forward under our contract flying with Continental are different than prior to the Amended Continental CPA.  Additionally in September 2008, we ceased our Branded Flying which began in April 2007.  Accordingly, results between 2008 and 2007 are not comparable.

            Selected Financial Information

		Year Ended December 31,
		2009			Increase/ (Decrease) 2009-2008				2008			Increase/ (Decrease) 2008-2007				2007
		(In thousands, except per share data and increase/decrease %’s)
Statement of Operations Data:
Operating revenue	$	688,258			(47.8	%)		$	1,318,213			(21.8	%)		$	1,685,545
Operating expenses		735,442			(48.7	%)			1,434,668			(20.0	%)			1,792,416
Operating loss		(47,184	)		(59.5	%)			(116,455	)		9.0	%			(106,871	)
Non-operating income (expense), net		(9,185	)		(148.6	%)			18,882			n/m				(10,292	)
Net loss	$	(3,306	)		(96.5	%)		$	(95,058	)		24.7	%		$	(76,241	)
Basic and Diluted loss per share	$	(0.21	)		(97.5	%)		$	(8.44	)		(40.6	%)		$	(14.20	)

            Statistical Information

		Year Ended December 31,
		2009			Increase/ (Decrease) 2009-2008			2008			Increase/ (Decrease) 2008-2007			2007
Operating Statistics:
Revenue passenger miles (millions) (1)		8,033			(16.0	%)		9,564			(5.0	%)		10,071
Available seat miles (millions) (2)		10,449			(17.1	%)		12,606			(7.1	%)		13,575
Passenger load factor (3)		76.9	%		1.0	pts		75.9	%		1.7	pts		74.2	%
Operating cost per available seat mile (cents) (4)		7.03			(38.2	%)		11.38			(13.8	%)		13.20
Block hours (5)		677,293			(18.3	%)		828,840			(9.6	%)		916,756
Operating cost per block hour (dollars) (6)		1,085			(37.3	%)		1,731			(11.5	%)		1,956
Departures		363,758			(16.0	%)		433,289			(11.5	%)		489,489
Average price per gallon of fuel, including fuel   taxes (dollars) (7)		2.43			84.1	%		1.32			32.0	%		1.00
Fuel gallons consumed (millions) (7)		5.5			(96.8	%)		172.9			(46.5	%)		323.2
Average length of aircraft flight (miles)		576			(3.0	%)		594			4.4	%		569
Average daily utilization of each aircraft (hours) (8)		7.60			(10.5	%)		8.50			(7.3	%)		9.17
Completion factor		98.2	%		0.8	pts		97.4	%		(0.2	pts)		97.6	%
Revenue passengers (thousands)		13,464			(13.9	%)		15,629			(10.0	%)		17,365
Actual aircraft in fleet at end of period		244			0.0	%		244			(10.9	%)		274

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	(1)	Revenue passenger miles are the number of scheduled miles flown by revenue passengers.
	(2)	Available seat miles are the number of passenger seats available multiplied by the number of scheduled miles those seats are flown.
	(3)	Passenger load factor equals revenue passenger miles divided by available seat miles.
	(4)	Operating cost per available seat mile is operating costs divided by available seat miles.  The reimbursable expenses are different under the terms of the Amended Continental CPA versus the Original Continental CPA, and therefore costs are inconsistent with prior periods, beginning July 2008.
	(5)	Block hours are the hours from gate departure to gate arrival.
	(6)	Operating cost per block hour is operating costs divided by block hours.
	(7)	Beginning in 2007, our fuel activity includes purchases to support our various business platforms outside of the Amended Continental CPA.  These purchases were executed through agreements with independent third parties.  Under the Amended Continental CPA, Continental is directly responsible for the cost of providing fuel for all flights operating as Continental Express; therefore, the related fuel expense is no longer included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.  Prior to July 1, 2008 under our fuel purchase agreement with Continental, fuel and fuel tax expense were reconciled to the lower of the actual costs or the agreed-upon caps.  From 2003 through July 1, 2008, our caps on fuel and fuel taxes, for aircraft operating under the Original Continental CPA, were 66.0 cents and 5.2 cents per gallon, respectively.
	(8)	Average daily utilization of each aircraft is the average number of block hours per day that an aircraft is operated.

            We monitor the statistical information above closely to ensure that we are continually focused on our operational efficiencies and cost control.

            The following discussion provides an analysis of our results of operations and reasons for any material changes for the periods indicated.

            Comparison of 2009 to 2008

            Operating Revenue and Segment Profit / (Loss)

            The table below (in millions, except percentage data) sets forth the changes in revenue, direct segment costs and segment profit from 2009 to 2008.  A significant portion of our operating expenses and infrastructure is integrated across segments (e.g., for non-airport facility rentals, outside services, general and administrative expenses) in order to support our entire fleet of 244 aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operation.  We believe that the presentation of our consolidated shared costs and transition costs is consistent with the manner in which these expenses are reviewed by our chief operating decision makers.  However, we continue to monitor the shared costs to identify direct segment expenses.  For example, in 2009 our entire fleet of 244 aircraft operated within the Contract Flying segment.  As such, aircraft related expenses are now identified as direct segment costs within our Contract Flying segment.  These costs are included as a part of the analysis of our operating expenses below. 

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		Fiscal Year
		2009			Total Revenue %				2008			Total Revenue %				Increase/ (Decrease)			Change %
Revenue from customers:
Contract Flying	$	654.2			95.0			$	1,059.3			80.4			$	(405.1	)		(38.2	)
Branded Flying (1)		—			—				222.0			16.8				(222.0	)		(100.0	)
Aviation Services		42.6			6.2				43.8			3.3				(1.2	)		(2.7	)
Eliminations		(8.5	)		(1.2	)			(6.9	)		(0.5	)			(1.6	)		23.2
Total revenue from customers		688.3			100.0				1,318.2			100.0				(629.9	)		(47.8	)
Direct segment costs:
Contract Flying		590.4			85.8				789.7			59.9				(199.3	)		(25.2	)
Branded Flying (1)		—			—				289.8			22.0				(289.8	)		(100.0	)
Aviation Services		27.4			4.0				23.8			1.8				3.6			15.1
Eliminations		(8.5	)		(1.2	)			(6.9	)		(0.5	)			(1.6	)		23.2
Total direct segment costs		609.3			88.5				1,096.4			83.2				(487.1	)		(44.4	)
Segment profit		79.0			11.5				221.8			16.8				(142.8	)		(64.4	)
Special items (2)		(1.3	)						(43.2	)
Other shared expenses		(124.9	)						(295.1	)
Gain on sale of short-term    investments, net		4.5							1.0
Impairment charge on investments		(0.1	)						(21.5	)
Extinguishment of debt		(1.0	)						2.1
Gain from debt discount		—							27.8
Settlement of fuel contracts (3)		—							23.1
Amortization of debt discount		(4.9	)						(10.5	)
Interest expense, net of capitalized    interest		(7.6	)						(8.3	)
Interest income		1.0							5.8
Equity investments loss, net		(0.4	)						(1.3	)
Other, net		(0.7	)						0.7
Consolidated loss before income    taxes	$	(56.4	)					$	(97.6	)

	(1)	Our Branded Flying segment was suspended in late 2008.
	(2)	In 2009, we concluded that the carrying values of certain of our long-lived assets, primarily idle general service equipment from our Aviation Services segment were no longer recoverable.  Special items for the twelve months ended December 31, 2009, include impairment charges of $1.3 million to write these long-lived assets down to their estimated fair values.  The $43.2 million in special items in 2008 consisted of $29.7 million and $13.5 million related to suspension of our Branded Flying and Contract Flying segments, respectively.
	(3)	The $23.1 million received in 2008 for settlement of fuel contracts related to the Branded Flying segment.

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            The table below (in millions, except percentage data) sets forth the segment profit (loss) in 2009 and 2008 for each segment.

			Contract Flying						Aviation Services
			2009			Total Revenue %			2009			Total Revenue %
Revenue from customers		$	654.2			100.0		$	42.6			100.0
Direct segment costs			590.4			90.2			27.4			64.3
Segment profit		$	63.8			9.8		$	15.2			35.7

		Contract Flying					Branded Flying					Aviation Services
		2008		Total Revenue %			2008		Total Revenue %			2008		Total Revenue %
Revenue from customers:	$	1,059.3		100.0		$	222.0		100.0		$	43.8		100.0
Direct segment costs:		789.7		74.5			289.8		130.5			23.8		54.3
Segment profit / (loss)	$	269.6		25.5		$	(67.8	)	(30.5	)	$	20.0		45.7

            Contract Flying.   The decrease in operating revenue and expenses within our Contract Flying segment is primarily due to our operating a full year under the Amended Continental CPA in 2009 compared to only six months in 2008 offset by a 42% increase in revenues from our Corporate Aviation (charter) division.

            Aviation Services.   In 2009, Aviation Services had a segment profit margin of 35.7%, down from 45.7% in 2008.   The decrease is due primarily to our transition to more competitively priced stand alone ground handling contracts and the adverse impact on operating results at Saltillo due to the recession and health concerns surrounding travel to Mexico in 2009.

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            Operating Expenses

            The table below (in million, except percentage data) sets forth the changes in operating expenses from 2009 to 2008.

		Fiscal Year
		2009		Total Revenue %				2008		Total Revenue %				Increase / (Decrease)			Change %
Wages, salaries, and related costs	$	329.2		47.8			$	397.5		30.2			$	(68.3	)		(17.2	)
Maintenance, materials and repairs		161.5		23.5				194.4		14.7				(32.9	)		(16.9	)
Other rentals and landing fees		60.5		8.8				96.2		7.3				(35.7	)		(37.1	)
Depreciation and amortization		30.3		4.4				36.4		2.8				(6.1	)		(16.8	)
Outside services		26.9		3.9				48.6		3.7				(21.7	)		(44.7	)
Aircraft rentals		21.9		3.2				197.1		15.0				(175.2	)		(88.9	)
Aircraft fuel and related taxes		13.4		1.9				228.0		17.3				(214.6	)		(94.1	)
Ground handling		9.3		1.4				59.6		4.5				(50.3	)		(84.4	)
Marketing and distribution		2.3		0.3				25.7		1.9				(23.4	)		(91.1	)
Impairment of fixed assets and   goodwill		1.3		0.2				20.8		1.6				(19.5	)		(93.8	)
Special charges		—		—				22.4		1.7				(22.4	)		(100.0	)
Other operating expenses		78.8		11.4				108.0		8.2				(29.2	)		(27.0	)
Total operating expenses	$	735.4		106.8			$	1,434.7		108.8			$	(699.3	)		(48.7	)

            Wages, salaries & related costs decreased from 2008 in relation to our 18.3% decline in block hours year over year offset slightly by increased health and medical costs for our employees.

            In the future, we anticipate that our wages, salaries and related costs may be affected by the following factors:

	•	wage increases to incentivize key personnel to remain with us as we continue to stabilize our Company;
	•	wage rate increases in accordance with our collective bargaining agreements as a result of higher seniority of our work force; and
	•	projected increases in health and medical benefit costs.

            Maintenance, materials and repairs decreased in line with the 18.3% decline in our block hours in 2009 and the reduction in our fleet that occurred in 2008.

            Other rentals and landing fees, Aircraft rentals, Aircraft fuel and related taxes, Ground handling and Marketing and distribution all decreased from 2008 due to the suspension of our Branded Flying operations and the differing treatment of these expenses under the Amended Continental CPA.  Under the Amended Continental CPA, Continental is directly responsible for the cost of providing fuel and paying aircraft rent for all flights operating as Continental Express.  In addition, Continental is directly responsible for airport facility rentals at stations served by Continental Express and for providing marketing and distribution services related to its operations.  Consequently, these items are not included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.  Please refer to the comparison of operating expenses of 2008 and 2007 below for further discussion of these charges in 2008.

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            Outside services decreased 44.7% in 2009 primarily to the elimination of certain airport service related expenses such as deicing, snow removal, and third party contracts in 2009 as they are paid for directly by Continental under the Amended Continental CPA.

            Impairment of fixed assets and goodwill and Special charges .  In 2009, we concluded that the carrying values of certain of our long-lived assets, primarily idle general service equipment from our Aviation Services segment were no longer recoverable.  Consequently, we recorded impairment charges of $1.3 million to write these long-lived assets down to their estimated fair values.  Please refer to the comparison of operating expenses of 2008 and 2007 below for a discussion of the impairment and special charges from those years.

            Other operating expenses decreased by 27.0% in 2009 as a result of the elimination of costs associated with our Branded Flying operations.  Many expenses such as per diem, travel and relocation, passenger services and catering declined or were eliminated in 2009 due to the suspension of Branded Flying operations.

            The table below (in millions, except percentage data) sets forth the changes in non-operating income (expenses) from 2009 to 2008.

		Fiscal Year
		2009			Total Revenue %				2008			Total Revenue %				Increase / (Decrease)			Change %
Gain on sale of short-term    investments, net	$	4.5			0.7			$	1.0			0.1			$	3.5			350.0
Impairment charge on investments		(0.1	)		(0.0	)			(21.5	)		(1.6	)			21.4			(99.5	)
Extinguishment of debt		(1.0	)		(0.1	)			2.1			0.2				(3.1	)		(147.6	)
Gain from debt discount		—			—				27.8			2.1				(27.8	)		(100.0	)
Settlement of fuel contracts		—			—				23.1			1.8				(23.1	)		(100.0	)
Amortization of debt discount		(4.9	)		(0.7	)			(10.5	)		(0.8	)			5.6			(53.3	)
Interest expense, net of capitalized    interest		(7.6	)		(1.1	)			(8.3	)		(0.6	)			0.7			(8.4	)
Interest income		1.0			0.1				5.8			0.4				(4.8	)		(82.8	)
Equity investment loss		(0.4	)		(0.1	)			(1.3	)		(0.1	)			0.9			(69.2	)
Other, net		(0.7	)		(0.1	)			0.7			0.1				(1.4	)		(200.0	)
Total non-operating expenses	$	(9.2	)		(1.3	)		$	18.9			1.4			$	(28.1	)		(148.7	)

            Gain on sale of short-term investments, net   in 2009 is a result of liquidation of a portion of our ARS portfolio for amounts in excess of carrying values.

            Impairment charge on investments was $0.1 million in 2009 as compared to $21.5 million in 2008.  An impairment of $13.7 million was recorded on our ARS holdings in 2008 due to the uncertainty in the ARS market and our need to liquidate our investments before it recovered.  Impairments related to our equity investments of $7.8 million were recognized during 2008.  We review our investments in unconsolidated affiliates for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Refer to Note 1, “Adjustments and Summary of Significant Accounting Policies,” and Note 4, “Fair Value Measurements,” in Notes to Consolidated Financial Statements for further information on our ARS.  Refer to Note 14, “Investments in Other Entities,” in Notes to Consolidated Financial Statements for further discussion of our equity impairments.

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            Gain from debt discount was $27.8 million in 2008 as we determined, in accordance with the Debt with Conversion Options Subtopic, that the fair value of the liability component of our $68.5 million 11.25% Convertible Secured Notes due 2023 outstanding at September 30, 2008, to be $40.7 million.  The difference was allocated to equity and is accounted for as a debt discount which will be amortized over the period until the next put date in August 2011.  The fair value adjustment was recorded as a non-recurring gain under non-operating income in 2008.

            Settlement of fuel contracts was $23.1 million in 2008 as we recorded a one time sale of our fixed forward purchase contracts for periods subsequent to September 2, 2008.

Comparison of 2008 to 2007

            Operating Revenue and Segment Profit / (Loss)

            The table below (in millions, except percentage data) sets forth the changes in revenue, direct segment costs and segment profit (loss) from 2008 to 2007.  A significant portion of our operating expenses and infrastructure is integrated across segments (e.g., for maintenance, non-airport facility rentals, outside services, general and administrative expenses) in order to support our entire fleet of 244 aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operation.  We believe that the presentation of our consolidated shared costs and transition costs is consistent with the manner in which these expenses are reviewed by our chief operating decision makers.  These costs are included as a part of the analysis of our operating expenses below.  As discussed in Note 1, “Adjustments and Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements , our Consolidated Financial Statements for each period presented have been adjusted for the retrospective application of the Debt with Conversion Options Subtopic.

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		Fiscal Year
		2008			Total Revenue %				2007			Total Revenue %				Increase/ (Decrease)			Change %
Revenue from customers:
Contract Flying	$	1,059.3			80.4			$	1,471.5			87.3			$	(412.2	)		(28.0	)
Branded Flying		222.0			16.8				180.5			10.7				41.5			23.0
Aviation Services		43.8			3.3				41.0			2.4				2.8			6.8
Eliminations		(6.9	)		(0.5	)			(7.5	)		(0.4	)			0.6			(8.0	)
Total revenue from customers		1,318.2			100.0				1,685.5			100.0				(367.3	)		(21.8	)
Direct segment costs:
Contract Flying		789.7			59.9				1,127.5			66.9				(337.8	)		(30.0	)
Branded Flying		289.8			22.0				294.9			17.5				(5.1	)		(1.7	)
Aviation Services		23.8			1.8				25.4			1.5				(1.6	)		(6.3	)
Eliminations		(6.9	)		(0.5	)			(7.5	)		(0.4	)			0.6			(8.0	)
Total direct segment costs		1,096.4			83.2				1,440.3			85.5				(343.9	)		(23.9	)
Segment profit		221.8			16.8				245.2			14.5				(23.4	)		(9.5	)
Special items (1)		(43.2	)						—
Other shared expenses,    including transition costs		(295.1	)						(352.1	)
Gain on sale of short-term    investments, net		1.0							—
Impairment charge on investments		(21.5	)						(7.0	)
Extinguishment of debt		2.1							0.9
Gain from debt discount		27.8							—
Settlement of fuel contracts (2)		23.1							—
Amortization of debt discount		(10.5	)						(11.2	)
Interest expense, net of    capitalized interest		(8.3	)						(7.2	)
Interest income		5.8							15.7
Equity investments loss, net		(1.3	)						(1.3	)
Other, net		0.7							(0.2	)
Consolidated loss before income    taxes	$	(97.6	)					$	(117.2	)

	(1)	The $43.2 million in special items consists of $29.7 million and $13.5 million related to suspension of our Branded Flying and Contract Flying segments, respectively.
	(2)	The $23.1 million received for settlement of fuel contracts relates to the Branded Flying segment.

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            The table below (in millions, except percentage data) sets forth the segment profit (loss) in 2008 and 2007 for each segment.

		Contract Flying					Branded Flying					Aviation Services
		2008		Total Revenue %			2008		Total Revenue %			2008		Total Revenue %
Revenue from customers:	$	1,059.3		100.0		$	222.0		100.0		$	43.8		100.0
Direct segment costs:		789.7		74.5			289.8		130.5			23.8		54.3
Segment profit / (loss)	$	269.6		25.5		$	(67.8	)	(30.5	)	$	20.0		45.7

		Contract Flying					Branded Flying					Aviation Services
		2007		Total Revenue %			2007		Total Revenue %			2007		Total Revenue %
Revenue from customers:	$	1,471.5		100.0		$	180.5		100.0		$	41.0		100.0
Direct segment costs:		1,127.5		76.6			294.9		163.4			25.4		62.0
Segment profit / (loss)	$	344.0		23.4		$	(114.4	)	(63.4	)	$	15.6		38.0

            Contract Flying.   The decrease in operating revenue and expenses within our Contract Flying segment is primarily due to new terms under the Amended Continental CPA which became effective July 1, 2008.  Prior to July 1, 2008, Airlines was entitled to receive payment for each block hour that Continental scheduled it to fly and was based on a formula designed to provide Airlines with a target operating margin of 10%.  The Amended agreement provides payments to us at a pre-determined rate based on block hours flown that are considerably lower than the rates under the original agreement.  Likewise, under the Amended Continental CPA, Continental is directly responsible for the cost of providing fuel and paying aircraft rent for all flights operating as Continental Express; therefore, these items are not included in our Consolidated Statement of Operations for periods subsequent to July 1, 2008.  In addition, Delta and ExpressJet mutually agreed in July 2008 to terminate their CPA effective September 2, 2008.

            Branded Flying .   We began Branded Flying on April 2, 2007 and suspended these operations September 2, 2008.  In July 2008, we announced we would suspend flying under the ExpressJet brand and Delta Prorate agreement, effective September 2008, due to record high fuel prices that made the Branded Flying operations impossible to sustain.  We were not profitable in this operation in 2008 or 2007.  Revenues from this flying were approximately 17% of our total operating revenue for 2008 and slightly less than 11% of our total operating revenue for 2007.  Average load factor within this segment was 69.1% in 2008 versus 55.7% in 2007.  In spite of seeing improvements in operations in 2008 over 2007, unprecedented high fuel costs continued to be the driving force in determining the profitability of Branded Flying and as such we chose to suspend the operations.  We recognized $18 million in revenue as a result of the suspension of operations due to adjustments to our air traffic liability, frequent flier plan and certain termination payments.

            Aviation Services.   In 2008, Aviation Services had a segment profit margin of 45.7%, up from 38.0% in 2007.  This increase is due primarily to additional ground handling contracts secured at more favorable rates than in 2007.

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            Operating Expenses

            The table below (in million, except percentage data) sets forth the changes in operating expenses from 2008 to 2007.

		Fiscal Year
		2008		Total Revenue %				2007		Total Revenue %				Increase / (Decrease)		Change %
Wages, salaries, and related    costs	$	397.5		30.2			$	437.6		26.0			$	(40.1	)	(9.2	)
Maintenance, materials and    repairs		194.4		14.7				201.4		11.9				(7.0	)	(3.5	)
Other rentals and landing fees		96.2		7.3				119.2		7.1				(23.0	)	(19.3	)
Depreciation and amortization		36.4		2.8				31.1		1.8				5.3		17.0
Outside services		48.6		3.7				58.3		3.5				(9.7	)	(16.6	)
Aircraft rentals		197.1		15.0				344.2		20.4				(147.1	)	(42.7	)
Aircraft fuel and related taxes		228.0		17.3				323.2		19.2				(95.2	)	(29.5	)
Ground handling		59.6		4.5				97.2		5.8				(37.6	)	(38.7	)
Marketing and distribution		25.7		1.9				31.4		1.9				(5.7	)	(18.2	)
Impairment of fixed assets and    goodwill		20.8		1.6				—		—				20.8		100.0
Special charges		22.4		1.7				—		—				22.4		100.0
Other operating expenses		108.0		8.2				148.8		8.8				(40.8	)	(27.4	)
Total operating expenses	$	1,434.7		108.8			$	1,792.4		106.3			$	(357.7	)	(20.0	)

            Wages, salaries & related costs decreased 9.2% from 2007 to 2008 primarily due to head count reduction in our work force related to the suspension of Branded Flying operations.  Additionally certain wage concessions were agreed to in 2008 under some of Airlines’ collective bargaining agreements and bonus plans were trimmed for 2008 due to our continuing losses.

            Other rentals and landing fees decreased 19.3% from 2007 to 2008.  Airport facilities and landing fees expense was down due to decrease in contract flying in 2008 and changes due to the Amended Continental CPA effective July 1, 2008.  Outside simulator rent was significantly higher in 2007 due to the start-up of the new lines of business and the need to train additional staff.

            Depreciation and amortization  increased 17.0% from 2007 to 2008.  This increase is primarily due to the full year impact of capital additions and improvements incurred in prior years as we ramped up for new operations.  The increase was partially offset by the reduced depreciation associated with our suspension of Branded Flying as we impaired $8 million of capital assets used to support these operations.

            Outside services decreased 16.6% from 2007 to 2008 primarily due to a decrease in expenses incurred to support our diversification strategy in 2007 and a reduction of approximately 50% in Continental administrative fees earned in 2008.  This fee was cancelled in the Amended Continental CPA.

            Aircraft rentals   decreased 42.7% primarily due to new terms under the Amended Continental CPA which became effective July 1, 2008.  Under the Amended Continental CPA, Continental is directly responsible for paying aircraft rent for all flights operating at Continental Express; therefore, the related aircraft rent expense is not included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.  In addition, lease payments for aircraft operating outside the Continental Express operations are contracted at significantly lower rates than previous years.

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            Aircraft fuel and related taxes decreased 29.5% primarily due to new terms under the Amended Continental CPA which became effective July 1, 2008.  Prior to July 1, 2008, our fuel price, including related fuel taxes, was capped at 71.20 cents per gallon under the Original Continental CPA.  Under the Amended Continental CPA, Continental is directly responsible for the cost of providing fuel for all flights operating as Continent Express; therefore, the related fuel expense is not included in our Consolidated Statements of Operation for periods subsequent to July 1, 2008.

            Ground Handling decreased 38.7% primarily due to new terms under the Amended Continental CPA which became effective July 1, 2008.  Under the Amended Continental CPA, Continental is directly responsible for all ground handling expenses at stations served by Continental Express.  In addition, under the Amended Continental CPA, Continental is directly responsible for the cost of providing fueling services for all flights operating as Continental Express; therefore, the related ground handling and aircraft servicing expense is not included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.

            Marketing and distribution decreased 18.2% primarily due to the suspension of flying under our ExpressJet brand and Delta Prorate effective September 2, 2008.  All marketing and distribution cost for aircraft operating within the Amended Continental CPA is incurred by Continental.

            Impairment of fixed assets and goodwill  increased $20.8 million primarily due to a $12.8 million non-cash impairment of goodwill related to the Amended Continental CPA, and a $8.0 million non-cash impairment to write-off certain capital assets, primarily non-moveable equipment, building and aircraft improvements.  Similar impairment charges did not occur in 2007.

            Special charges increased $22.4 million primarily due to the suspension of flying under our branded commercial passenger flight operations and our capacity purchase and pro-rate agreements with Delta in September 2008.  In connection with these capacity reductions and the transition of up to 39 aircraft back to Continental, we incurred special charges of $21.7 million related to aircraft, employee reductions and certain other charges in addition to a $0.7 million non-cash charge related to previously disputed base closure costs associated with the Original Continental CPA.  Similar impairment charges did not occur in 2007.

            Other operating expenses decreased by 27.4% in 2008 as compared to 2007 primarily due to the suspension of operations announced July 2008 for certain business lines.  Employee related expenses such as per diem, travel & relocation, and hotels declined in relation to the reduction in employee head count.  Passenger services and catering related expenses declined as the suspended business operations wound down.

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            Non-Operating Expenses

            The table below (in millions, except percentage data) sets forth the changes in non-operating income (expenses) from 2008 to 2007.

		Fiscal Year
		2008			Total Revenue %				2007			Total Revenue %				Increase / (Decrease)			Change %
Gain on sale of short-term    investments, net	$	1.0			0.1			$	—			—			$	1.0			100.0
Impairment charge on investments		(21.5	)		(1.6	)			(7.0	)		(0.4	)			(14.5	)		207.1
Extinguishment of debt		2.1			0.2				0.9			0.1				1.2			133.3
Gain from debt discount		27.8			2.1				—			—				27.8			100.0
Settlement of fuel contracts		23.1			1.8				—			—				23.1			100.0
Amortization of debt discount		(10.5	)		(0.8	)			(11.2	)		(0.7	)			0.7			(6.2	)
Interest expense, net of    capitalized interest		(8.3	)		(0.6	)			(7.2	)		(0.4	)			(1.1	)		15.3
Interest income		5.8			0.4				15.7			0.9				(9.9	)		(63.1	)
Equity investment loss		(1.3	)		(0.1	)			(1.3	)		(0.1	)			0.0			0.0
Other, net		0.7			0.1				(0.2	)		0.0				0.9			(450.0	)
Total non-operating expenses	$	18.9			1.4			$	(10.3	)		(0.6	)		$	29.2			(283.5	)

            Gain on sale of short-term investments, net  in 2008 is a result of liquidation of a portion of our ARS portfolio for amounts in excess of carrying values.

            Impairment charge on investments was $21.5 million for 2008 as compared to $7.0 million for 2007.  A $13.7 million impairment was recorded on our ARS holdings in 2008.  The need to record an other-than-temporary decline in valuation was caused by the uncertainty in the ARS market and the fact we may need to liquidate these investments before it recovers. Impairments on our equity investments of $7.8 million and $7.0 million were recognized during 2008 and 2007, respectively.  We review our investments in unconsolidated affiliates for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Refer to Note 1, “Adjustments and Summary of Significant Accounting Policies,” and Note 4, “Fair Value Measurements,” in Notes to Consolidated Financial Statements for further information on our ARS.  Refer to Note 14, “Investments in Other Entities,” in Notes to Consolidated Financial Statements for further discussion of our equity impairments.

            Extinguishment of debt was $2.1 million in 2008 and $0.9 million in 2007 as accounted for under the Debt with Conversion Options Subtopic.  The gains were calculated based on allocations of the fair value of the consideration issued in the tender offer and other repurchases of our convertible notes between the liability and equity components as compared to book value.

            Gain from debt discount was $27.8 million in 2008 as we determined, in accordance with the Debt with Conversion Options Subtopic, that the fair value of the liability component of our $68.5 million 11.25% Convertible Secured Notes due 2023 outstanding at September 30, 2008, to be $40.7 million.  The difference was allocated to equity and is accounted for as a debt discount which will be amortized over the period until the next put date in August 2011.  The fair value adjustment was recorded as a non-recurring gain under non-operating income in 2008.

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            Settlement of fuel contracts was $23.1 million in 2008 as we recorded the sale of our fixed forward purchase contracts for periods subsequent to September 2, 2008.

            Amortization of debt discount  represents amortization of the debt discounts recorded primarily under the Debt with Conversion Options Subtopic.  The remaining debt discount will be charged to non-operating income until August 2011, the next put date of our 11.25% Convertible Secured Notes due 2023.

            Interest income decreased primarily due to the volume of cash invested as well as decreases in the rate of interest earned.

Liquidity, Capital Resources and Financial Position

            Sources and Uses of Cash

            For the years ended December 31, 2009, 2008 and 2007, our operations used $12.3 million, $56.1 million and $39.9 million, respectively, in cash flow.  In addition to our cash and cash equivalents of $81.0 million and $57.5 million at December 31, 2009 and 2008, respectively, on those same dates we also had $17.7 million and $20.5 million of restricted cash.  Our restricted cash is comprised of collateral for our workers’ compensation coverage, customer deposits for future charter flights, letters of credit, and holdbacks required under our credit card processing agreements.

            In 2009, 2008 and 2007, we spent $4.9 million, $10.3 million and $48.9 million, respectively, on capital expenditures.  A majority of the expenditures for 2008 and 2007 were spent on flight and ground equipment to support the expansion of our operations to new lines of business and building our information technology infrastructure to support these new businesses and the increase in our flight schedules under the Amended Continental CPA.  Of the $10.3 million spent in 2008, approximately $1.9 million was spent on capital expenditures for our strategic business ventures which are outside of the Amended Continental CPA.

            Our 2009 cash flows included the following sources of cash outside of normal operating revenues:

	•	$10.5 million proceeds from the sale of certain non-core assets, including substantially all of the assets of two wholly-owned subsidiaries, American Composites and XJT Florida; and
	•	$5.0 million revolving line of credit (the “Citigroup Credit Facility”) entered into with Citigroup Global Markets Inc. (“Citigroup”).

            In light of the current economic recession, coupled with the Amended Continental CPA that pays us at lower block hour rates and is currently operating at record low utilization levels, we believe strict budgeting and cash preservation are crucial to sustain our liquidity and meet our financial obligations through 2010.  We believe that our existing liquidity, projected 2010 cash flows, including the incremental sources of liquidity described above, if needed, will be sufficient to fund current operations and our financial obligations through the year ending December 31, 2010.  However, as noted above, factors outside our control may dictate that we alter our current plans and expectations.

            In late 2009, the federal government passed the "Worker, Homeownership, and Business Assistance Act of 2009" which allowed taxpayers to elect to carry back either their 2008 or 2009 net operating loss for a period of up to five years. Holdings elected to carry back its 2008 net operating loss and recover a portion of federal regular and alternative minimum taxes paid in prior years. As a result, Holdings filed a carry back claim in December of 2009 with the Internal Revenue Service for $17.1 million, which refund is expected to be received in the first quarter of 2010.

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            Capital Expenditures

            Our capital expenditures in 2009 related to the following capital projects and rotable spare parts (in millions):

		2009
Flight Equipment	$	2.6
Ground Equipment		0.7
Technology		1.4
Other		0.2
	$	4.9

            These capital expenditures related primarily to modifications of our planes and technology needed to support the administrative operations we assumed from Continental.  Capital expenditures for 2010 are expected to increase as we anticipate spending between $9 million and $11 million on capital projects of which approximately $0.5 million relate to the rollover of existing capital projects.

            Projected capital expenditures for 2010 include start-up costs associated with the United Express Agreement.

            Long-term Debt

            We did not enter into any material long-term financing transactions in 2009.  As of December 31, 2009, total debt, including current maturities, totaled $49.4 million net of a discount of $13.5 million.  Our debt consisted of the 11.25% Convertible Secured Notes due 2023, the Citigroup Credit Facility and the secured debt owed under a series of secured loan agreements (the “EDC Loans”) with Export Development Canada.

            In July 2003, we completed an offering of $137.2 million aggregate principal amount of Original 4.25% Convertible Notes due 2023 with interest payable semi-annually.  Holders of this debt had the right to require that we repurchase their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any.  Under the indenture governing the convertible notes, we were able to satisfy the obligation with cash, shares of our common stock, or a combination of cash and shares.  During 2008, we took the following actions after consulting with our independent financial advisors:

	•	Received stockholders approval for two proposals that provided us greater flexibility in satisfying our repurchase obligations with respect to the Original 4.25% Convertible Notes due 2023, which included the ability to issue such number of shares of our common stock as necessary to repurchase all outstanding convertible notes that were tendered on August 1, 2008, and increased our authorized common stock from 200 million shares to 400 million shares;
	•	Commenced our repurchase offer for the Original 4.25% Convertible Notes due 2023 and provided written notice to the trustee of our intention to pay the repurchase price wholly in shares of our common stock;
	•	Unilaterally amended the indenture governing the notes to increase the coupon from 4.25% to 11.25% over the remaining note term, to provide security based on a pro-rata amount of collateral and to provide for an additional repurchase date on August 1, 2011, in order to provide improved terms and additional flexibility for the note holders; a nd
	•	Issued 16.4 million shares (Reverse Split adjusted) of our common stock in payment of the repurchase price for the $59.7 million principal amount of the notes validly tendered and to settle accrued and unpaid interest due August 1, 2008.  Because the common stock was issued in exchange for the Original 4.25% Convertible Notes due 2023 exclusively with the existing holders of the notes, and no commission or other compensation was paid in soliciting the exchange, the securities were exempt from registration under Section 3(a)(9) of the Securities Act of 1933.

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            For further details on our 11.25% Convertible Secured Notes, due 2023, refer to Note 7, “Long-term Debt,” in Notes to Consolidated Financial Statements.

            The EDC Loans consist of $10.7 million loaned to us in May 2003 and $6.6 million loaned to us in September 2003.  The EDC Loans are secured by certain of our flight simulators, flight data software and other equipment related to the simulators.   We used all the proceeds from the EDC Loans to reduce the principal under a note payable to Continental.  The amount due to EDC accrues interest at the six-month LIBOR plus 1.75% per annum.  Each of the EDC Loans has a term of 96 months and each contains customary representations, warranties and covenants.  Additionally, Continental is the guarantor of the EDC Loans, and a default under the guarantee would cause an acceleration of the loan.  In 2009, we made payments in the amount of $3.8 million on the EDC Loans, of which $3.5 million was principal.  As of December 31, 2009, the balance of the EDC Loans was $5.8 million.  As of December 31, 2009 and 2008, the fair value of the EDC Loans was approximately $5.3 million and $7.2 million, respectively.

            In March 2009, we entered into and drew down fully on the Citigroup Credit Facility to increase our liquidity.  The $5 million Citigroup Credit Facility, which has a five year term and is pre-payable at any time at our election, is secured by $10 million of our ARS holdings that were purchased from Citigroup.  Since the credit facility is secured by a portion of our ARS holdings, we classified the liability as current on our Consolidated Balance Sheet.  We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARS purchased from Citigroup.

            Other than our 11.25% Convertible Secured Notes due 2023, the EDC Loans and the Citigroup Credit Facility, we do not have any other material borrowings or available lines of credit.

            Securities Repurchase Program

            In July 2005, our Board of Directors authorized the expenditure of up to $30 million to repurchase shares of our common stock.  In February 2006, the Board authorized the inclusion of our Original 4.25% Convertible Notes due 2023 (now our 11.25% Convertible Secured Notes due 2023), within the previously announced program.  Our Board authorized an additional $15 million in 2008 and $10 million in 2009 to be utilized for purchases within this program.  Purchases have been made from time to time in the open market and in privately negotiated transactions; the timing of any repurchases under the program depends on a variety of factors, including market conditions, and may be suspended or discontinued at any time.  As of December 31, 2009, we had a balance of $9.7 million remaining within the program for additional purchases.

            The following table details annual activity under the share repurchase program (Reverse Split adjusted):

		Shares Repurchased (in thousands)			Average Cost per Share			Bonds Repurchased (1) (in millions)
2009		3,040		$	1.08		$	7.1
2008		4,035		$	1.91		$	11.1
2007		270		$	29.23		$	2.5
2006		—		$	—		$	—
2005		59		$	95.12		$	—

(1)

Bonds Repurchased include accrued bond interest.

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            Collective Bargaining Agreements

            The following table provides information related to our principal collective bargaining agreements and their respective amendable dates as of December 31, 2009:

Employee Group		Approximate Number of Employees		Representing Union		Contract Amendable Date
Pilots and Instructors		2,100		Air Line Pilots Association, International		December 2010
Mechanics		900		International Brotherhood of Teamsters		August 2009
Flight Attendants		1,000		International Association of Machinists and Aerospace Workers		August 2010
Dispatchers		100		Transport Workers Union of America		July 2009
Production Workers		30		Union of Industrial Production Workers		N/A

            Approximately 73% of our employees are covered by collective bargaining agreements.

            We are currently in negotiations with our Dispatchers and Mechanics whose contracts became amendable in 2009.  We will begin negotiations with our Flight Attendants and Pilots as their contracts become amendable in 2010.  Our contract with our production workers does not have a term but salaries are typically renegotiated each year.  We anticipate these amendments to be cost neutral for us (i.e., any increase in wages and benefits will be offset by productivity gains).

            Income Taxes

            The tender offer and partial redemption in August 2008 of the Original 4.25% Convertible Notes due 2023 triggered a change in ownership limitation under Section 382 of the Internal Revenue Code (“Section 382”) in August 2008. Section 382 limits a taxpayer's ability to utilize certain carryover tax attributes after a substantial cumulative change in ownership. This limit is determined, in part, by the market capitalization of the company at the time of the ownership change. The Section 382 change triggered in August 2008 resulted in a significant reduction in Holdings’ deferred tax assets. At the time Holdings became aware of the 382 change, Holdings recorded a full valuation allowance against all of its deferred tax attributes at year end 2008.

            During the first part of 2009, Holdings continued to observe a significant turnover in ownership base as well as a decline in market capitalization. During the third quarter of 2009 Holdings became aware of a second potential Section 382 change in ownership. At that time recent market capitalization suggested the possibility for further significant limitations on Holdings’ deferred tax attributes which resulted in Holdings’ continuing to fully value its newly recorded tax assets. At the end of 2009, Holdings recorded the impact of a second observed Section 382 change in ownership. We determined that it was more likely than not that we would not be able to realize approximately $280 million of our gross deferred tax assets related to our federal net operating losses, intangible assets, and certain other tax assets.  Consequently, we adjusted those assets to their net realizable values as of December 31, 2009 as reflected in the table above.  The offset was recorded as a reduction to the valuation allowance of our deferred tax assets and liabilities.

            In late 2009, the federal government passed the "Worker, Homeownership, and Business Assistance Act of 2009" which allowed taxpayers to elect to carry back either their 2008 or 2009 net operating loss for a period of up to five years. Holdings elected to carry back its 2008 net operating loss and recover a portion of federal regular and alternative minimum taxes paid in prior years. As a result, Holdings filed a carry back claim in December of 2009 with the Internal Revenue Service for $17.1 million which is expected to be received in the first quarter of 2010. 

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            Additionally, during 2008 we recorded $8.5 million in income tax expense to record a valuation allowance for certain deferred tax assets related to capital losses and, international and state tax net operating losses as management concluded it was more likely than not that adequate income would not be generated to utilize these deferred tax assets based on their characterization and/or carryforward period.

            We account for income taxes in accordance with the subsections of ASC Topic 740, “Income Taxes”.  This guidance clarifies the accounting for uncertainty in income taxes recognized in financial statements if a position is more likely than not of being sustained by a taxing authority.  As of December 31, 2009 there were no material unrecognized tax benefits or associated accrued interest and penalties.

            See the table below for expiration dates of our tax attribute loss carryforwards:

			December 31, 2009 (in millions)			Statutory Carryforward Period			Expiration Year(s)
Net Operating Carryforwards
Federal Loss		$	21.0			20			2027 to 2029
Federal Credit		$	13.7			No expiration			N/A
State Losses		$	9.2			5 to 20			2010 to 2029
International Loss		$	2.4			10			2016 to 2019

            For further disclosures related to income taxes, refer to Note 8, “Income Taxes," in Notes to Consolidated Financial Statements.

            Purchase Commitments

            During 2009, our remaining 50 options with Embraer for aircraft purchases within the ERJ-145 Family expired unexercised.

            We also have other contractual obligations of approximately $138.6 million in 2010 under our power-by-the-hour contracts with various service providers.  The power-by-the-hour contracts dictate the method by which we pay a vendor based on our actual level of operations in exchange for vendor coverage on specific parts and equipment on our aircraft when those parts and equipment are in need of repair or replacement.  Each contract varies in term and payment procedure.  The estimated amount of our future commitment is based on assumptions related to future level of operations and forecasted payment rates.  Forecasted payment rates are based on actual rates as of January 1, 2009 and increased annually according to the particular inflation indices detailed in each contract.  Contractual rate increases at actual time of occurrence may be different than the forecasted rates.

            For the year ended December 31, 2009, we spent $4.9 million on capital expenditures.  In 2010, we anticipate spending between $9 million and $11 million in capital expenditures of which approximately $0.5 million relate to the rollover of existing capital projects.  We expect to fund our future capital commitments substantially through internally generated funds.  However, there can be no assurance that sufficient financing will be available for all aircraft and other capital expenditures not covered by firm financing commitments.

            Off-Balance Sheet Arrangements

            In the ordinary course of business, we enter into operating leases related to our aircraft, spare engines and facilities.  In accordance with U.S. GAAP, these arrangements are not reflected on our balance sheet; however, they are reasonably likely to have a material effect on our future financial statements and financial outlook.

            We enter into these arrangements to gain access to aircraft, equipment and facilities without requiring significant capital up front.  Since these assets are used in connection with our consolidated operations, these assets are required to generate substantially all of our passenger revenue.

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            If Continental terminated the Amended Continental CPA for cause, it would have the right to terminate our leases or subleases for aircraft operating as Continental Express under the agreement and take possession of them.  In addition, Continental would have the ability to reject the leases and subleases on all of our aircraft if it filed for bankruptcy protection.  Moreover, with the reduction notice and Continental’s ability to terminate the Amended Continental CPA, we could lose access to some or substantially all of our airport facilities. Refer to Item 1A, Risk Factors for additional information related to risks and uncertainties.

            Aircraft Leases.   The primary leases on 226 aircraft in our fleet of 244 aircraft are held by Continental and expire between 2013 and 2022.  As we are the sublessee for such aircraft, our ability to retain access to the aircraft could be adversely affected if Continental were to default under the terms of the primary leases.  For a more detailed description of risks related to our aircraft leases, refer to Item 1A, Risk Factors.  The remaining 18 aircraft in our fleet are owned by Continental.

            In 2009, Continental was directly responsible for the aircraft rent payments for all flights operated as Continental Express under the terms of the Amended Continental CPA.  As of December 31, 2009, our 2010 expected total minimum annual rental payments under current and future non-cancelable aircraft operating leases for aircraft operating outside of the Continental Express operations was approximately $26.8 million.

            Other Leases.   Other leases and subleases are primarily related to ground facilities (airport and maintenance) spare engines, and a flight training device.  These leases have greatly varying terms, which we expect, in most cases, to be renewed or replaced.  As of December 31, 2009, our expected total minimum annual, non-aircraft rental payments for 2010 under current and future non-cancelable operating leases are approximately $9.2 million. The expected total minimum rental payments for 2010, by category, are as follows (in millions):

		2010
Airport facilities	$	0.3
Maintenance facilities		3.4
Flight equipment		3.3
Administrative facilities and other		2.2
	$	9.2

            Contractual Obligations and Commercial Commitments

            The following table summarizes the expected effect our material debt (including interest where applicable), operating leases and other contractual obligations have on our future cash flows as of December 31, 2009 (in millions):

			Total			2010			2011			2012			2013			2014			Over 5 Years
11.25% Convertible Secured Notes    due 2023 (1)		$	63.9		$	5.9		$	58.0		$	—		$	—		$	—		$	—
Citigroup credit facility (2)			5.2			5.2			—			—			—			—			—
Other long-term debt (3)			6.0			3.6			2.4			—			—			—			—
Aircraft operating leases (4)			147.2			26.8			27.2			27.1			26.9			26.7			12.5
Other operating leases (5)			71.4			9.2			8.8			8.7			8.2			7.5			29.0
Other contractual obligations (6)			866.0			138.6			151.8			160.1			162.8			167.7			85.0
Total expected cash obligations		$	1,159.7		$	189.3		$	248.2		$	195.9		$	197.9		$	201.9		$	126.5

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	(1)	Following the completion of the tender offer related to our convertible debt in August 2008 and subsequent bond repurchases in the fourth quarter of 2008, $60.8 million aggregate principal of our Original 4.25% Convertible Notes due 2023 remained outstanding.  As provided in the amended indenture governing the notes, such notes have become our 11.25% Convertible Secured Notes due 2023 with an additional repurchase date on August 1, 2011.  The expected impact of our 11.25% Convertible Secured Notes due 2023 on our future cash flows assumes the current principal balance of the notes will be redeemed on August 1, 2011, the earliest date the holders of the notes may require us to repurchase the notes.  If the notes are held until August 1, 2023, the maturity date, our obligations outlined above would increase by $70.3 million as a result of additional interest expense related to these notes.  Refer to Note 7, “Long-term Debt,” in Notes to Consolidated Financial Statements for further description of these notes.
	(2)	In March 2009, we entered into and drew down fully on the Citigroup Credit Facility with Citigroup to increase our liquidity.  Since the credit facility is secured by a portion of our ARS holdings, we classified the liability as current on our Consolidated Balance Sheet.  We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARS purchased from Citigroup.
	(3)	Other long-term debt represents our obligation for the advances received under the EDC Loans.  For a detailed discussion of our financing arrangement with EDC, refer to Note 7, “Long-term Debt,” in Notes to Consolidated Financial Statements.   The expected effect of our financing arrangement with EDC on our future cash flows is calculated based on the six-month LIBOR plus 1.75% per annum and includes principal payments of $5.8 million and estimated interest payments of $0.2 million.
	(4)	Aircraft operating lease obligations are the estimated lease payments for the 38 aircraft under long-term operating leases and subleases from Continental as of December 31, 2009. These agreements with Continental have substantially the same terms as the lease agreements between Continental and the third-party lessors, and expire between 2013 and 2022, however, lease obligations are only assumed through the end of the Amended Continental CPA on June 30, 2015 or through the end of the sublease term on April 30, 2015.   Consistent with the Amended Continental CPA, lease payments for the covered aircraft will be incurred directly by Continental.  Lease obligations for the remaining aircraft operating outside of the CPA are reflected above at reduced rental rates.
	(5)	Other operating lease obligations represent the estimated lease payments for our ground service equipment, spare engines and substantially all of our ground facilities, including facilities at public airports, from Continental or the municipalities or agencies owning and controlling such airports that are under operating leases.  Other operating lease obligations also include the lease payments related to a flight training device.  Continued operations are assumed through normal lease renewals.
	(6)	Other contractual obligations primarily include our power-by-the-hour agreement with Rolls Royce.  We expect to fund this commitment with cash generated from operations.  The estimated amount of future commitments for Rolls Royce is based on assumptions related to anticipated future levels of operations and forecasted payment rates.  The level of operations inherent in the estimated amounts for Rolls Royce is based on Continental’s and United’s most recent operating plan for Airlines, which can be altered at their sole discretion and includes our aircraft that are operating in our other lines of business.  Contractual rate increases at actual time of occurrence may be different than the forecasted rate inherent in the amounts for Rolls Royce.

            The actual effects that the listed obligations above may have on our future cash flow may differ materially from our estimates.

            Other Contingent Liabilities or Commitments

            We are a party to many contracts in which it is common for us to agree to indemnify third parties for tort liabilities that arise out of or relate to the subject matter of the contract.  In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct.  We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.  However, we expect that we would be covered by insurance for any such liabilities, subject to deductibles.

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            We are a defendant in various lawsuits and proceedings arising in the ordinary course of our business.  While the outcome of these lawsuits and proceedings cannot be predicted with certainty, we do not believe that the ultimate disposition of these proceedings will have a material adverse effect on our financial position, results of operations or cash flows.

Item 7A.  Quantitative and Qualitative Disclosure about Market Risk

            We have been and are subject to market risks, including commodity price risk (such as, to a limited extent, aircraft fuel prices) and interest rate risk.

Aircraft Fuel

            Prior to July 1, 2008, Continental provided all of our aircraft fuel needs for the aircraft operating as Continental Express under the Original Continental CPA, and we incurred fuel expense and fuel tax equal to the lower of the actual cost of the fuel and the related taxes or agreed-upon caps of 66.0 cents and 5.2 cents per gallon, respectively.  As a result, our cost of fuel was 71.2 cents per gallon for the six months ended June 30, 2008.  Under the Amended Continental CPA, Continental is directly responsible for the cost of providing fuel for all flights operating as Continental Express; therefore, the related fuel expense is not included in our Consolidated Statements of Operations for periods subsequent to July 1, 2008.

            Under the United Express Agreement, we agreed to a fuel risk sharing program with United whereby our markup is tied to an index consisting of the gap between increases in the price of fuel and increases in United’s passenger revenue per available seat mile.  As the gap between these two metrics rises, our markup could be reduced up to 4 percentage points.

Interest Rates

            We have potential interest rate exposure under the EDC Loans which bears interest at the six-month LIBOR plus 1.75% per annum.  We also have potential interest rate exposure under the Citigroup Credit Facility which bears interest at the open federal rate plus a variable spread per annum.  The interest rates applicable to these variable rate notes may rise, increasing our interest expense.  The impact of market risk is estimated using a hypothetical increase in interest rates by 100 basis points for our variable rate long-term debt.  Based on this hypothetical assumption, any additional amounts incurred in interest expense for both our EDC Loans and the Citigroup Credit Facility for all periods presented would not be material.

            As of December 31, 2009 and 2008, we estimated the fair value of our $52.1 million and $60.8 million (carrying values) convertible notes to be $50.3 million and $38.9 million, respectively, based upon a fair valuation model that considered quoted market prices.  Changes in the fair market value of our fixed-rate debt could be affected by a variety of factors including general investor behavior, industry specific risks and interest rate risks.  Holders of this debt had the right to require that we repurchase their notes on August 1, 2008.  On that date we satisfied $59.7 million in aggregate principal of outstanding notes that had been validly tendered. Following the completion of the tender offer, $68.5 million aggregate principal of our Original 4.25% Convertible Notes due 2023 remained outstanding.  In accordance with the Debt with Conversion Options Subtopic, we calculated the fair value of the liability component of our 11.25% Convertible Secured Notes due 2023 to be $40.7 million and the equity component and related debt discount to be $27.8 million.  The $27.8 million discount is being accreted to “Amortization of debt discount” in our Consolidated Statements of Operations and will continue until August 1, 2011.  Subsequent to repurchases made in 2009, our interest expense, calculated using the effective interest method, related to the debt discount will be $7.8 million in 2010 and $5.7 million for the seven months ending July 31, 2011. In conjunction with the amortization of debt discount, we are currently amortizing $2.0 million of capitalized fees associated with the convertible debt refinancing to interest expense until August 1, 2011.

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Item 8.  Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Management’s Report on Internal Control Over Financial Reporting		64
Report of Independent Registered Public Accounting Firm		65
Report of Independent Registered Public Accounting Firm		66
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting		67
Consolidated Statements of Operations for each of the Three Years in the Period Ended     December 31, 2009		68
Consolidated Balance Sheets as of December 31, 2009 and 2008		69-70
Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended     December 31, 2009		71
Consolidated Statements of Stockholders' Equity (Deficit) for each of the Three Years in the     Period Ended December 31, 2009		72
Notes to Consolidated Financial Statements		73

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders of
ExpressJet Holdings, Inc.

            Management is responsible for the preparation and fair presentation of the financial statements included in this report.  The financial statements have been prepared in conformity with U.S. generally accepted accounting principles and reflect management’s judgments and estimates concerning effects of events and transactions that are accounted for and disclosed.

            Management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a -15(f) and 15d - 15(f) under the Securities Exchange Act of 1934.  The internal control over financial reporting of ExpressJet Holdings, Inc. (the “Company”) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  The Company’s internal control over financial reporting includes those policies and procedures that:

	(i)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company;
	(ii)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
	(iii)	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

            Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control.  Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparations and may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

            Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

            The Company’s internal control over financial reporting as of December 31, 2009 has been audited by KPMG LLP, an independent registered public accounting firm, which also audited the financial statements of the Company for the year ended December 31, 2009, as stated in their report which is presented in this Annual Report.

/s/ T. PATRICK KELLY T. Patrick Kelly Interim President and Chief Executive Officer		/s/ LAMPHUNG NGO-BURNS                 LamPhung Ngo-Burns Vice President and Chief Financial Officer
/s/ ROBERT BICKMORE                        Robert Bickmore Senior Director and Controller

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