( UAIR) circles its second bankruptcy filing in as many years, shares of regional partner
have paid a price of their own. But as investors fret about US Airways' fate and Mesa's recent restatement of earnings, some analysts think Mesa's a cheap stock worth buying.
On Monday morning, UBS Warburg analyst Robert Ashcroft told investors that the market had overstated fears of another Chapter 11 filing by US Airways, which Mesa expects to account for 35% of its revenue in 2004. With Mesa shares falling, Ashcroft reiterated his buy rating on the stock and boosted his 12-month price target to $16.50 from $15.50, telling investors "we love to buy fear and Mesa is saturated with it." (UBS Warburg does and seeks to do business for the companies covered in its research reports.)
US Airways warned Friday that it may have to "re-examine its strategic options, including but not limited to asset sales or a judicial restructuring" in a filing with the
Securities and Exchange Commission
In reaction, shares of US Airways, which would likely be worthless if the carrier were to file for bankruptcy again, were down 22 cents, or 10.4%, to $1.90. Mesa shares were volatile, but up 18 cents to $6.74.
With US Airways in trouble again, Ashcroft said investors overlooked the fact that Mesa's
second-quarter adjusted earnings were three times higher than last year's levels, the company's best performance in a decade.
"Mesa's stock has languished as the market frets about the future of its largest customer ... US Airways isn't healthy, but absent a drastic change for the worse, it's unlikely to file for Chapter 11 this year," noted Ashcroft. "TWA limped along for years before it filed its final Chapter 11 and besides, we haven't seen US Airways sell assets, a traditional stop on a legacy major airline's journey to oblivion."
Blood in the Water
But some of the fear is legitimate -- US Airways has been weighing an asset sale for months. In February, the carrier put its East Coast shuttle on the block, along with some hub slots and gates, while telling employees that it planned to move away from the hub model to cut costs. With
debuting service this month in Philadelphia, a key US Airways' market, competitors smell blood and have already begun circling US Airways' routes for increased competition.
The competitive response comes at a time when US Airways' management has been shaken up. In the last month, former CEO David Siegel and former CFO Neal Cohen have departed with million-dollar severance packages, bowing to pressure from unions, who are unwilling to cut their pay.
With US Airways' cost to fly one paying customer one mile coming in above 10 cents in the first quarter, many experts feel bankruptcy is just a matter of time unless unions make another deal. In comparison, Southwest's costs are just 7.83 cents a mile.
"US Airways is not long for this world if costs remain so far above the competition," said William Alderman, president of Alderman & Co., a boutique aerospace investment bank. "If you compare its costs to Southwest, which is maybe more realistic, the company is 40% above Southwest's levels."
Bankruptcy Not Exactly Bad
But what's bad for US Airways may not be devastating to Mesa, which flew for US Airways while it was both in and out of bankruptcy and has been improving its cash position and cleaning up its balance sheet. Not only could it take months for US Airways to file a second bankruptcy, it could take years for the carrier to get so weak that it has to stop flying completely -- giving Mesa ample time to shift flying to other customers.
This process is already occurring at Mesa, which will see US Airways go from accounting for 45% of revenue in 2002 to about 33% in 2005, according to analyst estimates. On its first-quarter conference call, Mesa executives said they were considering "contingency plans for several alternative scenarios" if US Airways were to file again.
"We understand the risks involved in our business model and are taking the necessary steps to be prepared for any scenario that we face going forward," said Jon Ornstein, Mesa's CEO, in an interview with
Ultimately, analysts say the big issue for Mesa is not a Chapter 11 filing by US Airways, but a Chapter 7, complete liquidation, which would halt US Airways' service completely. But even in this case, Ashcroft argued that Mesa could survive without US Airways, thanks to a healthier cash position.
While Ornstein wouldn't elaborate on the preparations being made, according to Ashcroft, Mesa's options if US Airways liquidated would not be so bad. Mesa could easily begin flying as a regional partner to whoever assumed US Airways' routes or Mesa could pick up US Airways' old routes and serve them itself. In a worst-case scenario, Mesa would be able to sell off some regional jets, which it financed cheaply before the World Trade Center attacks.
"Mesa has enough cash to survive even a year without revenue from its US Airways fleet, so US Airways' liquidation is highly unlikely to kill Mesa," said Ashcroft. "Conservatively assume that in the long run, Mesa only breaks even on its ex-US Airways' fleet and Mesa still looks cheap."
Mesa shares are cheap and getting cheaper -- they've been falling since Dec. 23, when the company's hostile bid to take over
Atlantic Coast Airlines
( ACAI) and create the nation's largest regional carrier was called off after government officials began voicing antitrust concerns. Despite the fact that Mesa's traffic has been growing and revenue was up more than 50% in the second quarter, shares have fallen more than 50% in four and a half months.
The problems at US Airways are not the only issues pressuring Mesa shares. In the carrier's second-quarter earnings release, it said it would have to restate four years of earnings results to reflect an accounting change. In reaction to the April 30 news, Mesa's shares have fallen nearly 11%, but the rationale behind the restatement may not be fully understood by skittish investors.
Over the last few years, the cash-strapped Mesa has fueled its rapid growth by relying on interim financing alternatives, which were treated like operating leases on the balance sheet. But with Mesa making payments and buying planes, Mesa's accountants began treating the leases as loans against an owned asset, forcing the company to restate earnings in SEC filings on Friday.
"The cumulative restatement over four years prior to the March quarter is $4.8 million, or about 12 cents a share, an average of less than a penny a quarter over that time," said Ashcroft.
With US Airways teetering and accounting issues looming, it's unsurprising that investors are bailing out of Mesa stock. But those with a taste for risk may want to take a closer look at the carrier.
"Confront the fear of US Airways' liquidation head-on," said Ashcroft, "and Mesa stock is a compelling proposition."