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Mesa bankruptcy a long time coming


Mesa’s bankruptcy filing yesterday was really no surprise, given its two-year spiral and the potential loss of two of its three partners. The 28-year-old company filed for Chapter 11 in the US Bankruptcy Court in the Southern District of New York yesterday morning and plans to restructure, promising to operate as normal, including codeshare agreements with United, US Airways and Delta. Not included in the filing is go!, the company’s Hawaiian operation.

Mesa's shares dropped 50% to USD0.06 per share. The Associated Press reported shares have been trading between USD0.01 and USD0.36. It opened at USD.04 yesterday after the announcement.

“Our company has ample liquidity to support itself during this process and we are confident we will emerge from Chapter 11 an even stronger operation,” said Chair and CEO Jonathan Ornstein. “The foundation of our business - our people, operational integrity and values - remains intact, and the 20 plus years that many of us have worked together form a bond from which we will draw our strength as we face and overcome this challenge."

Ambitious, but, in the end, too many aircraft

The last time Mesa Air Group announced its financial results was in its third quarter ended last July when it said it earned third quarter income from continuing operations of USD1.7 million on operating revenues of USD232.6 million. It should have reported its fourth quarter in November, but missed that as well as a reporting goal to NASDAQ.

Total operating revenues for the third quarter of 2009 decreased USD121.3 million, or 34.3% primarily resulting from a year-on-year decrease in capacity and lower fuel revenue.  The income of USD1.7 million, or USD0.01 per share on a diluted basis, compares to income from continuing operations of USD1.8 million, or USD0.07 per diluted share for the same period of fiscal 2008.  

Pro forma net income for the quarter was USD2.3 million or USD0.02 per diluted share compared to a net loss of USD2.5 million or USD0.09 per diluted share for the same period of fiscal 2008. Pro forma net income for the quarter includes after-tax adjustments including USD1.4 million for income from equity method investments, USD1.2 million for a maintenance reserve and USD0.9 million for costs associated with its Chinese joint venture.

Mesa has been working with creditors and lessors to reconfigure financial obligations, but the bankruptcy puts the 10 regional jets it has on order from Bombardier at risk, especially since it cited the fact it has too many non-performing aircraft on its books already. Bombardier is Mesa’s second largest creditor behind Wells Fargo.

Bombardier is already owed USD133 million by Mesa, which has about 52 of its 130 planes parked. However, the majority of the grounded aircraft are 50-seat jets and the Bombardier order is for 10 CRJ 700 jets set for delivery in 2013. Major carriers are looking for larger regional jets and are shedding 50-seaters at record rates.

"We work with Mesa regularly and we will continue to work with Mesa while it restructures and we are monitoring the situation closely," said Bombardier Spokesperson John Arnone said in press reports. "These are tough times in the aviation industry, and we have seen some of our customers come out of bankruptcy protection stronger and better equipped to deal with their challenges."

Analysts are expecting order cancellation from regional airlines because of the dramatic cutbacks imposed by their major carrier partners. It could reduce CRJ production rates by 20%-21% in its next fiscal year. This will likely be discussed in its fourth quarter call. Bombardier just gained a 22-aircraft order for CRJ 700s from American Eagle.

Chinese burn

There is no question that Mesa was one of the most daring of US regional airlines. Its riskier moves included a partnership with Shenzhen Airlines in the creation of a new Chinese regional, Kunpeng Airlines which would provide a destination for Mesa’s 50-seat jets once they were spun out of the fleet. Indeed, Mesa cited its overwhelming lease obligations on aircraft that were no longer flying as a result of the massive capacity cuts imposed by its partners, in its bankruptcy filing.

The Kunpeng partnership ended abruptly when Kunpeng ordered five Embraer ERJ 190s, informing Mesa that it would not need the additional 15 CRJ 200s scheduled to join the five already in its fleet. Mesa owned 44% of the joint venture. At the same time, Mesa revealed it was trying to sell its stake in the Chinese airline. In Apr-2009, the company completed transactions divesting its indirect interest in the Kunpeng Airlines joint venture taking back the five aircraft.

Hawaiian paradise lost

In a costly move, the company also tried to invest in both Hawaiian and Aloha airlines before starting its own inter-island carrier, go!. The two carriers were successful in their suit against Mesa charging unfair and deceptive practices. Mesa was ordered to pay Hawaiian USD80 million in damages plus litigation costs by Hawaiian’s US Bankruptcy court overseeing the suit. The major carrier had sought USD170 million and suspension of go! operations for a year. After posting a USD90 million bond, Mesa ultimately settled the Hawaiian litigation for USD52.5 million.

In a twist, Mesa settled the Aloha suit gaining licensing access to the Aloha name. However, feelings ran so high against Mesa that the judge would not approve the use of Aloha by Mesa. It later forged a deal with Mokulele Airlines as a codeshare partner to broaden its reach in the islands but there, too, Mesa’s relationship was rocky, ultimately filing suit against the smaller carrier when it cut a deal with Republic Airways Holdings which included a substantial investment and the deployment of ERJ 170s.

Mokulele to keeping going

Mesa and Republic are now partners in Mokulele. Mokulele will fly as go! under the joint venture announced last fall that will compete against Hawaiian. The new go! Mokulele brand, what the two call the islands' first low-cost carrier service, debuted. Under the terms of the JV agreement, Mokulele shareholders will contribute their ownership of Mokulele to the JV and will own 25% of the new venture. Additionally, current Mokulele shareholders will be obligated to fund up to USD1.5 million to capitalize the JV. Republic, which is the majority shareholder of Mokulele, foregave Mokulele’s USD3.1 million outstanding debt, net of surrendered aircraft deposits.

Relations were no less contentious with its major carrier partners. In 2008, Delta tried to terminate its relationship with Mesa subsidiary Freedom Airlines citing operational problems. Mesa fought back, saying the operational problems were caused by Delta itself and filing for an injunction against the termination which was granted by both the US District court and, later, confirmed a court of appeals. For that reason, it feels confident that it will prevail when the USD70 million suit it is currently pursuing against Delta comes to trial. In the meantime, last April Mesa removed six ERJ-145 aircraft from the Delta Connection Agreement, leaving 22 145s in place which accounts for 3% of the Delta Connection fleet.

In addition, United Airlines exercised its early termination rights for Mesa's operation of 10 Dash-8 turboprop aircraft effective no later than 30-April-2010. In November, United also failed to renew Mesa’s operation of 26 CRJ-200s which will also come out of the United Express operation by April.  The removal of the turboprops and jets leaves only 20 CRJ-700s flying as United Express after May 1.

Bankruptcy only way forward

"Founded in 1982, Mesa has grown from a company operating a single seven-passenger airplane into one of the largest independent regional air carriers,” said Chair and CEO Jonathan Ornstein in a statement. “We were one of the first airlines to operate regional jets and pioneered the ‘revenue-guarantee’ business model - both now standards in the industry.

Ornstein went on to say bankruptcy was the “most effective and efficient means to restructure with minimal impact.” He cited the changing regional airline industry when he added: “This process will allow us to eliminate excess aircraft to better match our needs and give us the flexibility to align our business to the changing regional airline marketplace, ensuring a leaner and more competitive company poised for future success.”

In a two-year effort, the company managed to restructure financial obligations with lessors, creditors and others. “These efforts have led to the elimination of over USD160 million of debt obligations, the return of a number of aircraft, and the restructuring of inventory management and engine overhaul agreements,” he said. “We are nonetheless faced with an untenable financial situation resulting primarily from our continued lease obligations on aircraft excess to our current requirements. In addition, this action will give us the opportunity to reach a more timely conclusion in the litigation with Delta Air Lines in which Mesa is currently seeking damages in excess of USD70 million."

Mesa expects to receive approval from the bankruptcy court to continue operations including authority to continue to pay employee salary and benefits, fulfill code-share partner agreements, honor customer programs, and pay vendors and suppliers for post-petition goods and services. Vendor and supplier invoices incurred prior to the commencement of the Chapter 11 case that have not been paid will be resolved through the company's Plan of Reorganization which requires Court approval and has yet to be submitted.

"We remain committed to our partners and customers by providing continued low-cost, regional air service that has permitted Mesa to become a leading regional airline," said Mr Ornstein. "Our company has ample liquidity to support itself during this process and we are confident we will emerge from Chapter 11 an even stronger operation. The foundation of our business - our people, operational integrity and values - remains intact, and the 20 plus years that many of us have worked together form a bond from which we will draw our strength as we face and overcome this challenge."

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