A new chapter for Mesa?

The Securities & Exchange Commission requires publicly-traded companies to notify them -- and, thereby, the public -- whenever something happens that might materially affect the company. So Mesa Air Group this week felt obliged to file a notice to the SEC that it might have to file for Chapter 11 next week, depending on the outcome of a certain court hearing. This has nothing to do with the $52 million Mesa paid to settle its differences with Hawaiian Airlines, or the pending suit by the corporate ruins of Aloha Airlines, which seeks to blame Mesa for the fact that Aloha Airlines doesn't have an airline any more. No, this is a contract dispute between Mesa and Delta Air Lines. But ripples from their rift could reach our shores. Mesa owns the go! interisland service and also flies a scant few routes under its own imprimatur on the mainland. But mostly Mesa makes its living flying regional service for major U.S. airlines under other brand names. Mesa flies most United Express flights, for example. And it has two separate regional contracts with Delta Air Lines, one of which, accounting for 20% of Mesa's entire revenue base, Delta wants to cancel. If I read it right, the two sides do not dispute the fact that a number of flights were canceled, and Delta says the number is greater than acceptable, putting Mesa in breach of contract. Mesa says Delta is trying to redefine terms in the contract retroactively and has gone to court to prevent the cancellation. But Mesa's own pilots say half the pilot work force has turned over in a year and Mesa sometimes cancels flights because it hasn't got enough pilots to drive the planes. In its SEC filing, Mesa said the loss of 20% of its revenue, millions a month, would trigger a domino effect of debt service defaults and force it into bankruptcy. It would also be stuck with 34 planes it would have trouble redeploying at a time when airlines are parking planes to save fuel. Ordinarily, Chapter 11 wouldn't be a bad thing for Mesa or go!, since bankruptcy judges can compel vendors to keep supplying the company. Stories abound of companies hobbled by chronic supply shortages until they're driven into receivership and suddenly can operate normally again. But we have seen how it can be otherwise. Aloha suddenly lost its lavish funding by investors, and its debtor-in-possession lender, which had its own problems due to the credit crisis on the mainland, imposed more conditions than usual, driving Aloha to shutdown. ATA Airlines suddenly lost its biggest contract, flying charters for the Air Force, and that was the end of ATA. Mesa's situation is not precisely comparable. It relies heavily on a few contracts but no single one of them is as vital as that Air Force deal was to ATA. Mesa has more cash than Aloha did. It also has the advantage of being a collection of airlines rather than a unified whole, so if it really gets into a jam it could shed a whole operation without affecting the rest of the company much. I doubt if it would shut down go! but it might sell it, if it could find someone who wanted it in this environment. Then there is the matter of what is to become of Jonathan Ornstein. Mesa is very much a CEO-driven company. Mesa couldn't be more driven by one personality if it sold popcorn and its CEO were named Orville. Can he survive a bankruptcy? When Hawaiian Airlines entered its last Chapter 11, its majority shareholder and CEO, John Adams, found himself ejected from management at the behest of the the creditors. Bankruptcy judges have got that kind of authority.

Comments

[Carl Christensen]

Does Hawaiian actually have the $52 million it was awarded in hand, or is it merely another creditor that would have to wait in line with everybody else in the event Mesa files for bankruptcy? The bankruptcy possibility also suggests that Aloha might not get much out of even a successful suit against Mesa.