Mesa Air comes full circle with United Express flying

 - January 23, 2008, 4:51 AM

Mesa Air Group chairman and CEO Jonathan Ornstein once again embraced the old adage “never say never” when the unpredictable industry veteran recently revived his airline’s association with a pair of estranged partners. Just weeks after reuniting with the Regional Airline Association–a group he once characterized as “total political animals, more concerned with Washington cocktail parties than with making a real difference”–Ornstein scored his own political coup de grâce when he signed a tentative deal with United Airlines to fly de Havilland Dash 8-200s from Denver as United Express.

The new contract will effectively end Mesa’s half-decade hiatus from a relationship that once provided its largest source of revenue. The five-year “revenue guarantee” contract, scheduled for completion this month, will allow Mesa to fly ten 37-seat Dash 8s as United Express from Denver International Airport, where it now flies 50-seat CRJs under a foundering pro-rate deal with Frontier Airlines.

Although at press time neither United nor Mesa had publicized the route schedules, Mesa group executive vice president Peter Murnane confirmed that the Dash 8s would replace Dornier 328 service now flown by fellow United Express partner Air Wisconsin. Scheduled to open the new operation in July, Mesa expects to fill the entire complement of 10 Dash 8s within “two to three months.” Murnane said the airplanes would come from both outside sources and Mesa’s current fleet of 12 de Havilland turboprops, now flying within its America West and US Airways Express systems. He could not specify how many airplanes would come from each source, however.

Murnane said the deal with United differs from typical fee-per-departure contracts in that Mesa will accept the risk for a large portion of its costs, aside from items such as fuel, for example. Although it guarantees revenue based on a formula tied to set monthly payments, block hours and completed departures, it does not feature a so-called “cost-plus” component under which Mesa can expect a given profit margin. Nevertheless, Mesa apparently believes the new contract will prove more lucrative than the pro-rate deal in which it participated with United until 1998.

“We are delighted to have the opportunity to return to the United Express family,” said Ornstein. “Mesa stands ready to do whatever we can to assist United in its successful restructuring and it is our hope that we can play a meaningful role going forward.”

Such words of reconciliation from Ornstein would have seemed inconceivable only five years ago, after United severed its ties with Mesa before their previous code-share contracts expired. After acquiring Aspen Airlines in 1990 and WestAir in 1992, Mesa expanded its United Express business to include hubs in Denver, San Francisco, Los Angeles, Seattle and Portland. But by 1997, increased costs associated with ill-conceived expansion attempts and the FAA’s so-called “One Level of Safety” rule, combined with declining revenues resulting, in part, from Mesa’s acceptance of a mid-contract change to its pro-rate formula with United, ravaged the company’s balance sheets.

In an attempt to stem the losses, Ornstein unilaterally dropped Mesa’s United Express service to several unprofitable markets, citing a clause in its contract that allegedly allowed it to exit markets on which it lost money for 90 days. United balked, and one-by-one canceled Mesa’s code-share deals at its various United Express bases until, by fall 1998, the airlines’ relationship deteriorated into complete acrimony, punctuated by a series of court battles.

All told, the loss of the United code-share cost Mesa roughly half of its passenger traffic over the course of a year. But by summer 2001, United appeared likely to merge with now primary Mesa code-share partner US Airways, leaving Ornstein in a rather awkward position. Faced with a completely untenable position, Mesa suddenly dropped its 1999 lawsuit against United in exchange for a two-year extension of its US Airways contract in the event the merger won Justice Department approval.

Even though the merger ultimately did not pass antitrust tests, Ornstein called the resolution with United “the best thing we ever did,” particularly given his desire to enter more code-share contracts with major airlines. “United had offered us a pretty big cash settlement, but my view was, $10 million isn’t worth spit compared to having a good relationship with the world’s largest airline, and it’s much better just to let the thing go,” said Ornstein during a CRJ signing ceremony in 2001. “We’ve developed a relationship that’s 180 degrees different from what it was.”

Of course, when Mesa filed the lawsuit in 1999, talks between United and US Airways had yet to reach a serious stage, and the tendency of major airlines to buy their regional affiliates appeared likely to limit opportunities for multiple code shares. Today, lessons learned from the 2001 Comair strike set in motion a reversal of that trend, said Ornstein, opening many more chances for independent entities such as Mesa to sell their services to a variety of potential mainline partners.

Meanwhile, as United continues negotiations with all its United Express partners for $80 million worth of service-rate concessions, Mesa stands in a prime position to compete for even more business, particularly if its pilots soon ratify a tentative labor contract agreed upon in February. The reemergence of Mesa as a United Express partner could spell bad news for airlines such as SkyWest, Air Wisconsin and Great Lakes Aviation, all of whom had hoped to figure more prominently in United’s designs for a bolstered regional network.

“We certainly don’t want to stay with ten Dash 8s,” said Murnane in response to questions about the possibility of Mesa’s participation in United’s planned regional jet expansion. “But we’re happy not only to do regional jet flying, but additional Dash 8 flying. We certainly would be willing to do [Beech 1900 flying] too.”