Battered Mesa Air Holds Out Hope - TheStreet

CHARLOTTE, N.C. -- Things could hardly have been worse for

Mesa

(MESA) - Get Report

in 2008, as the 91% decline in the airline's share price amply demonstrates.

The Phoenix-based regional carrier was recently threatened with delisting by

Nasdaq

. It has sued

Delta

(DAL) - Get Report

, one of its principal partners, which had sought to terminate a contract.

Attempted new business ventures in other parts of the world have had some unintended consequences. In Hawaii, where it set up a new interisland airline in 2006, Mesa lost one lawsuit, paying out $52.5 million to

Hawaiian

(HA) - Get Report

, and settled a second, paying $2 million to the estate of defunct Aloha. Mesa was accused of using confidential information obtained from Hawaiian, and of predatory pricing.

Meanwhile, in China, Mesa sold a once-vaunted partnership with Shenzen Airlines, taking a $7.4 million loss.

Currently, with $92 million worth of bonds coming due, Mesa is trying to convince bondholders to take stock in payment. It's not an easy sell, given that shares traded Tuesday at 20 cents, but bondholders may decide that getting something beats getting less in bankruptcy court.

Last week, Mesa reported earnings for its fiscal fourth quarter, which ended Sept. 30. The net loss was $22.3 million, compared with a loss of $62.2 million a year earlier. Excluding special items, pro forma net income was $3.1 million, the company said, up from $2.2 million. Revenue was $325 million, down 1%.

The late filing triggered the delisting threat. Mesa attributed the delay to an accounting issue associated with its value falling below the value of net operating losses, triggering a compilation of its various owners. In fact, had Nasdaq not suspended its rules on minimum share price due to the troubled economy, Mesa would still face delisting.

A couple of factors explain Mesa's continued existence. For one, it remains a leading regional airline, with 56 aircraft at

United

( UAUA), 55 at

US Airways

(LCC)

and 28 at Delta.

CEO, Jonathan Ornstein, is a colorful, indefatigable airline industry character, one who is always looking for an angle, always optimistic about the chances he has taken recently.

So it should not be surprising that during last week's earnings call, Ornstein was optimistic about Mesa's future. "Clearly the company faces a lot of challenges," he said. But "we believe (we) will be cash flow positive next year and we believe we will be profitable as well."

Ornstein said 96% of Mesa's fleet is under contract and its relationships with United and US Airways remain strong. He hinted at negotiated settlements with bondholders and with Delta.

He said business in Hawaii is flourishing, noting, "We are adding an aircraft for spring and summer, advance bookings are strong -- March doubled last year -- and we continue to see positive traffic trends."

The operation, called "go!" could benefit from taking the historic Aloha name. The deal with Yucaipa, Aloha's largest creditor, had in fact included the name. However, the federal judge in Aloha's bankruptcy has blocked the acquisition, citing a "lack of sensitivity," given that Mesa helped to push Aloha out of business before seeking to claim its name.

In the Delta case, Delta said in March that it planned to terminate a contract under which a Mesa subsidiary operates Delta Connection flights with ERJ-145s, due to the failure to maintain a 95% completion rate during a three-month period. The contract is worth $20 million a month, Mesa says.

Mesa sued Delta, alleging that it canceled flights at Delta's request, primarily because Delta wanted to use the slots at New York's Kennedy International Airport for other flights. A federal judge in Atlanta blocked the termination in May: a hearing is set for Jan. 30. Delta subsequently terminated another contract, under which Mesa flew CRJ-900 regional jets.

Jesup and Lamont analyst Helane Becker says Mesa can conceivably turn things around, but first must solve its many problems. "The airline industry in general is going to be profitable this year, but whether Mesa can be profitable is still up in the air," she says.

"They have a lot of issues they are dealing with," she says. "They are looking at having bonds put to them, they have to settle with Delta before they can grow in any large measure, and the balance sheet needs to be restructured. It's still a cloudy and highly risky picture."

Meanwhile, in a recent report CreditSights said Mesa inflated its share count to settle convertible bond issues, and now, "with share count growing from 30 million to 900 million, it will need a 1 for 100 reverse split after everything settles." But after going "through semi-hell and almost back," Mesa is "almost bottoming," the firm says.