Mesa does UAL’s bidding with move to absorb ACA
It didn’t take long for Mesa Air Group’s seemingly innocuous new code-share deal with United Airlines to raise far wider implications, as Mesa chairman and CEO Jonathan Ornstein last month launched a bid to spread his company’s influence beyond its already substantial breadth with an overture to buy Atlantic Coast Airlines. The proposal, issued after what Ornstein described as a thorough analysis of ACA’s plans to create a new low-fare airline based at Washington Dulles International Airport, called for an exchange of nine-tenths of a Mesa share for each share of ACA stock, at the time representing a 25-percent premium on the Virginia-based regional’s trading value. At press time ACA had yet to respond formally to Mesa, but released a statement confirming receipt of the proposal and its intent to review the offer.
The estimated $510 million deal would not only double the size of Mesa’s fleet and significantly alter the competitive balance of the nation’s regional airlines; it would also give United a vital East Coast feed alternative to ACA, which, after rejecting United’s demands for lower contract fees, over the summer revealed plans to establish a low-fare operation independent of its long-time mainline partner. Fully aware of the implications, United moved to solidify and expand its relationships with other partners, including Mesa. Not coincidentally, Mesa rejoined the United Express family in April with a modest code-share deal involving 10 de Havilland Dash 8s, followed by a much wider agreement involving Bombardier CRJ200s and -700s over the summer.
Financing those RJ acquisitions continues to prove troublesome, however. Although Ornstein said the financing barriers have not yet kept Mesa from fielding any of the airplanes it has ordered, even deals involving just a few airplanes have turned difficult and time consuming. Not only would a takeover give Mesa access to leaseholds at Dulles International now controlled by ACA; it would also give it ready access to 118 more regional jets and 28 turboprops. In fact, Ornstein revealed that before his offer to buy ACA, he approached CEO Kerry Skeen with a proposal to sublease ACA’s regional jets. ACA, whose plans for the new low-fare venture include using its CRJs for routes of up to 1,000 nm, rejected the offer.
“The demand for RJs exceeds our ability to supply aircraft,” said Ornstein. “Combining with Atlantic Coast, we feel very comfortable that all the aircraft that we have on order and those that we are contemplating ordering will become financeable.” A recently signed deal with United raised Mesa’s responsibility for 50-seat jets in that system from 15 to 25 airplanes. Mesa also agreed to fly 20 seventy-seat Bombardier CRJ700s for United, and it expects soon to convert a letter of intent to fly as many as 31 more CRJ700s as US Airways Express.
Meanwhile, ACA accelerated preparations to acquire a fleet of narrowbody jets– most likely Boeing 737s or Airbus A320-family airplanes–for its planned network of low-fare routes from Dulles. Early last month indications pointed to an imminent deal, prompting quick and public action from Mesa. “Clearly, that’s really the primary reason we chose to move forward with a public offer like this,” said Ornstein. “We could have chosen the more traditional route of meeting with management, and sitting down and talking. The fact is because [ACA’s] plans are moving forward, it was imperative that we move quickly.”
Another reason may have involved the price of the airlines’ respective stock at the time of the offer. By October 3, Mesa’s stock price had risen to $11.30 from a 52-week low of $2.46. Conversely, ACA’s share value fell from a high of $17.12 to $9.02. Mesa’s proposed stock swap would give ACA shareholders a 25-percent premium over ACA’s closing stock price on October 3 and a 35-percent premium over its trading price since July 28–the day ACA announced its plans to sever ties with United.
Inquiries about the timing of the deal also raised the specter of ACA’s refusal, leading to the obvious question, “What then?”
“If Atlantic Coast chooses not to enter dialogue, we are prepared to pursue this on an unsolicited basis, and take our offer directly to the ACA shareholders,” said Ornstein, who called their initial response “very positive.” But Mesa might also have to contend with Atlantic Coast’s so-called “poison pill,” a device designed to prevent a hostile takeover by increasing its cost through the issuance of new preferred shares that carry severe redemption provisions. “We have looked at that,” said Ornstein. “I do feel confident that there are certain strategies that we could pursue that will make sense. There is the ability to act with written consent, and I know that is one of the options we will be looking at.”
Responding to questions about a potential backlash from ACA’s employees, particularly its pilots, Ornstein characterized the deal as “labor friendly,” and said he would not immediately move to integrate ACA onto the Mesa certificate. “We’ve had some discussions [about integration] already with some of the employee leadership here,” said Ornstein. “Personally, I think it would be easier to leave things separate, which would certainly be our plan initially.”
He also said he would keep ACA’s management team, including CEO Kerry Skeen, should he want to continue running the division. Skeptics wonder how long such
an arrangement would last, however, given Ornstein’s reputation for impatience with incumbent management and hard-nosed labor bargaining.
After returning to Mesa in 1998 after a two-and-a-half year stint with Virgin Express, Ornstein completely gutted the old management structure, citing philosophical differences. A little more than a year later he orchestrated a similar management purge at newly acquired CCAir, then gradually replaced the Charlotte, N.C. division’s Jetstream turboprops with Beech 1900s flown by lower-paid pilots from Mesa’s Air Midwest subsidiary. Finally, after ALPA refused to sanction a concessionary wage agreement with the remaining pilots, Ornstein closed the operation for good.
Mesa’s pilots, whose payscale ranks among the lowest in the industry, recently ratified a new labor deal that still pays them considerably less than ACA’s pilots. Ornstein, however, said he wouldn’t ask for pay cuts from the Atlantic Coast group, nor did he seem to think that he would have to address the pay imbalance immediately with the Mesa pilots. “I would imagine that our pilots, like everyone else, would like to get paid more money,” acknowledged Ornstein. “But we have the good fortune of having a four-and-a-half year contract, and so I guess in four years we’ll have that discussion with them. I don’t think that our pilots, who are upgrading within two or three years to become jet captains, are particularly concerned about rates as they are about opportunities, because if you came to work at Mesa five years ago, you would have made more money because of your ability to advance than at any other regional carrier.”
Regarding the ACA pilots, whose prospects of flying Boeing or Airbus jets would disintegrate with a Mesa takeover, Ornstein stressed the value of job security with a traditional feeder carrier over a position with a startup engaged in what he characterized as a risky pursuit of a dubious low-fare strategy.
“I think the pilots at Atlantic Coast have a vested interest in seeing their airline survive,” said Ornstein. “I think all of us have a vested interest in seeing our partners do well. Certainly if Atlantic Coast were to go and start a separate entity, I don’t think that would be in the interest of United or US Airways. And I think that when labor looks at the benefits this brings in terms of keeping ACA as a feeder operation and strengthening United and not threatening the US Airways of the world, they’ll view this as a very labor-friendly deal.”
Another major airline with a “vested interest” in the deal–Delta Air Lines–carries a change-of-control provision in its code-share contract with ACA, meaning it could discontinue the relationship once Mesa takes control. Ornstein acknowledged that he hadn’t yet engaged in “any substantive discussions whatsoever” with Delta, but said he doubted the major airline would tolerate the disruption in service. Even if Delta chose that course of action, Mesa could easily place ACA’s 30 Delta Connection 328JETs with other partners, he added.