Mesa files Chapter 11, seeks relief on leases

 - January 28, 2010, 8:57 AM
Mesa Air Group rang in the new year with a resolution of sorts, as it started the process of restructuring its operations by filing for Chapter 11 bankruptcy protection on January 5. The move came some six weeks after United Airlines filed a court complaint to block Mesa’s efforts to replace some of the 50-seat CRJ200s scheduled for removal from the United Express system on April 30 with ten 70-seat CRJ700s.

During the restructuring, said Mesa, it will continue to operate as normal and without interruption under its code-share agreements with US Airways, United Airlines and Delta Air Lines. Mesa did not include its Hawaii-based go!-Mokulele joint venture in the filing.

Over the past two years Mesa has scrambled to eliminate $160 million in debt, return a number of airplanes to their lessors and restructure inventory management and engine overhaul agreements, but it finally reached a point at which it couldn’t dispose of its seat capacity fast enough.

Mesa hopes that the United States Bankruptcy Court for the Southern District of New York will relieve it of its obligations related to leases on a number of airplanes it no longer flies because its mainline code-share partners chose not to renew their contracts.

“Over the past two years, we have worked closely with our lessors, creditors and other constituents to restructure our financial obligations,” said Mesa chairman and CEO Jonathan Ornstein. “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 $70 million.”

Mesa’s predicament certainly didn’t build to a crisis point overnight, nor did it happen in a vacuum, as the regional airlines as a whole continue to suffer the effects of their major airline partners’ cost-cutting and capacity “rightsizing” efforts.
With the exception of eight short-term leases, Mesa acquired aircraft financed primarily through long-term leveraged leases that exceeded the duration of its code-share agreements. As a result, as certain code-share agreements expired, Mesa remained obligated for the remaining lease and installment payments and maintenance expenses associated with the aircraft–in some cases for a “significant” period of time.

“These risks were recognized at the time these aircraft were leased but, given the fundamental changes to the aviation industry and the more recent downturn in the credit markets during the past year, it was not foreseeable that demand for certain regional aircraft would literally evaporate in less than three years,” Mesa president Michael Lotz wrote in a court affidavit.

For Mesa, though, the shifts in the regional airline market hit particularly hard given its extensive exposure to the 50-seat market and United Airlines’ refusal, for example, to allow Mesa to replace its 50-seat jets with 70-seaters on a given time schedule. As a result, Mesa must remove 26 Bombardier CRJs from its United Express network by April 30, the same deadline it faces for removing 10 de Havilland Dash 8s from that system. As of January 5 it flew 18 CRJ200s, 20 CRJ700s and seven Dash 8s as United Express.

According to the affidavit filed by Lotz, United held the option to extend the term of its contract covering the 26 CRJ200s for five years and Mesa “made numerous attempts to negotiate mutually agreeable terms,” but the efforts proved unsuccessful. Mesa originally had intended to place 20 of the airplanes with Kunpeng Airlines, a joint venture it entered in 2006 with China’s Shenzhen Airlines.
The endeavor proved unprofitable, however, and Mesa sold its 49-percent share in the airline last year for $4.5 million in an effort to generate needed cash. According
to Mesa, its former partners never returned the five CRJ200s the Phoenix-based regional sent to China for the venture, resulting in a $4.4 million loss in the second quarter of last year.

Mesa had since notified United of its intention to replace some of the CRJ200s scheduled for removal from its United Express network on April 30 with 10 CRJ700s between October 15 and December 15 of this year; however, United claims in a complaint filed in the U.S. District Court for the Northern District of Illinois that its contract clearly requires a direct, one-for-one replacement. In its complaint, United claims that Mesa’s planned delivery schedule does not correspond with the retirement of 10 CRJ200s and, therefore, “United may properly decline the ten [CRJ700s] at issue.”

Although Mesa also continues to fly as Delta Connection, that relationship stands on shaky ground as well, as Delta continues its efforts to sever ties with the Phoenix-based regional over a “material breach” related to the Embraer ERJ145 flying that Mesa’s Freedom Airlines subsidiary performs as Delta Connection. The 2008 effort by Delta met with stiff resistance from Mesa, which claimed Delta’s own scheduling actions resulted in its failure to meet its flight completion rate guarantees.

The judge hearing the case issued a preliminary injunction blocking Delta’s move and the major airline lost an appeal in July. Still, of the 36 Embraer ERJ145s delivered to Mesa, 12 now sit idle and another two operate under a sublease agreement. Mesa and Delta await word on a trial date in district court that will determine the fate of the 22 remaining ERJ145s.

Meanwhile, on August 19, a suit filed by Delta in Georgia District Court claims that Mesa breached certain “most favored nations” pricing provisions of the Delta code-share deal covering the Embraer jets. The clause requires Mesa to match the lowest cost of any of Delta’s regional carriers, which Delta claims Mesa failed to do. Although the court as of last month had not yet ruled on Mesa’s motion to dismiss the claim, Mesa said it plans to file a countersuit related to Delta’s failure to use Mesa’s aircraft on a “full time basis” and the major airline’s refusal to comply with the annual rate-setting provisions of the code-share agreement.

Later that same month Delta moved to cancel a separate code-share deal covering 14 of its own CRJ900s Mesa had agreed to operate, again on the grounds that the regional carrier did not meet performance guarantees. By the time Delta issued its notice, Mesa had taken seven of the airplanes. Although Mesa subsequently returned all the airplanes, on March 20 it filed suit in Georgia District Court seeking damages, including lost profits and costs associated with pilot retraining. Delta filed a counterclaim alleging breach of contract on Mesa’s part.

As of January 5, some 52 of 178 Mesa aircraft sat parked generating no revenue, including a total of 17 CRJ200s, the 12 ERJ145s, 16 de Havilland Dash 8-200s and 20 Beech 1900Ds formerly flown by its now defunct Air Midwest subsidiary. Over the next several months, Mesa said it expected to retire another 25 airplanes, leaving it with 101 in operation.