Looking to invest in an airline that has solid earnings growth, double-digit percentage traffic growth, good control over costs and isn't named JetBlue ( JBLU) or Southwest ( LUV)? Consider Mesa Air Group ( MESA), a small regional carrier operating out of Phoenix, serving 150 markets as a code-share partner for big guys like America West ( AWA) and US Airways. Last week, the company announced second-quarter earnings that handily topped Wall Street estimates and on Wednesday, it said traffic was up 31% in the first four months of 2003. Savvy investors already have caught on to the Mesa story, doubling the stock since it hit $3 on March 13, when it was depressed by war fears. But even after the move, long-term buyers could see additional upside as the company continues to move away from unprofitable turboprops and into the regional jets that its larger partners prefer.
Mesa was founded in 1982 and previously served the Southwest region mostly, with propeller planes, ferrying customers in and out of underserved markets. But as code-sharing's popularity surged, especially over the last few years, the company has been adding more and more regional jets, chasing business from larger carriers. Currently, Mesa plans to jump from the 70 regional jets it had at the end of 2002 to nearly 170 by the end of 2005. But expanding capacity and buying more planes during the worst downturn in the history of commercial aviation is a daunting task, especially when it comes to finding financing. (Standard and Poor's and Moody's both have downgraded airline credit ratings in recent months.) More than fuel costs, labor negotiations or any other factor, Mesa's ability to raise cash to buy planes will determine its success -- and is the biggest risk investors must stomach. "They certainly are one of the lower-cost regional airlines and their ability to get jets will drive their growth," said Cristello. "They're partners with US Air, who are clearly willing to give them growth as long as they can provide jets."
The carrier reports that it has interim financing lined up for most of its regional jet deliveries in 2003, which helps alleviate near-term growth uncertainty," said Brian Harris, analyst at Citigroup Smith Barney, in a report from last Friday. "But that still leaves about 15 other undelivered regional jets that are not financed." In Harris' view, there are too many uncertainties out there to value Mesa based on 2004 earnings expectations. He estimates there could be as much as 10 cents per share downside to his 2004 earnings estimates if the company can't finance what it plans to add. But even Harris is cautiously optimistic, telling investors that "with the economy expected to improve, we think the potential upside scenario is more likely than not."