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Monday, June 2, 2003

Airline Profile: Mesa Air

Regional airlines tend to be identified by the individuals who lead them - the "Cult Of The Personality," as it were. This is nowhere more true than at Mesa Air Group [Nasdaq: MESA] headed by a president and CEO noted for taking failing airlines and turning them in profitable, efficient and well organized operations. Although highly controversial and hard charging, Jonathan Ornstein has never been labeled as anything less than brilliant--certainly not boring.

The original Mesa Airlines was started in August 1982 by Larry Risley and his wife Janey, flying a six-passenger Saratoga between Farmington and Albuquerque, N.M., three times a day. They later expanded into Chieftains, then Beech 99s and ultimately Beech 1900s.

During the period 1987 and 1988, Ornstein was starting his aviation career with Air LA, a small Los Angeles-based commuter, working at everything from finance to baggage handling and aircraft cleaning. In 1988, Ornstein was involved in the negotiations for the sublease of an aircraft from Mesa. The next year he accepted an offer from Risley to join Mesa as assistant to the president.

In 1990 Mesa went into an expansion mode. "We started acquiring a bunch of airlines that were effectively bankrupt," Ornstein said. "Maybe not technically bankrupt, but they couldn't pay their bills." These included Aspen Airways, operating Convair 580s and BAe 146s; Air Midwest, West Air and Crown Airways. By the time it acquired Crown Airways in 1994, Mesa had grown from an airline earning $11 million in revenues in 1986 to one earning $505 million.

When West Air was acquired in 1992, it was the largest, and least profitable, independent regional carrier in the United States. Ornstein was named president with the mandate to turn it into a profitable enterprise. By the next year, West Air broke its string of 10 consecutive quarterly losses and posted a pretax profit in excess of $15 million.

Along with acquiring the troubled airlines, it also acquired their operations as United Express and US Airways Express carriers.

In 1994 Ornstein left Mesa to take over Continental Express' operation. Mesa continued to do well in 1995 and 1996, "then the bottom dropped out in 1997," Ornstein said. During that period Mesa also lost United [OTC BB: UALAQ] as a code-share partner and became involved in a running lawsuit with the mainline carrier.

While at Continental Express, Ornstein transformed it from an airline that lost $40 million in 1993 into a highly successful, profitable regional carrier. He then accepted an invitation from Virgin Atlantic Chairman Richard Branson to develop Virgin Express, a low-fare, low-cost carrier operating out of Brussels, Belgium. He was appointed CEO of Virgin Express in 1996, and chairman in 1998.

That same year, Ornstein was asked to return to Mesa as president and CEO. He accepted that offer, resigning as CEO of Virgin Express, but retaining the title of chairman.

When Ornstein took over the Mesa reins, the airline was losing around $1 million a week and still involved in its lawsuit with United. Ornstein immediately brought in a new management team and shortly thereafter the lawsuit was resolved, a six-year agreement was signed with America West, the code share agreement with US Airways [OTC BB: USALA] was significantly expanded to include regional jets, a new code-share agreement with Frontier Airlines [Nasdaq: FRNT] was signed, the partnership with Midwest Express was reestablished, the airline moved its headquarters from New Mexico to Phoenix, Ariz., a revolving line of credit was reestablished with Mesa's banks and $2.5 billion worth of orders for regional jets were placed with Bombardier and Embraer. The airline had four regional jets when Ornstein arrived back from Brussels. Next year it will have over 100.

Mesa also had purchased CCAir, a small turboprop operator based in Charlotte, N.C., in order to strengthen Mesa's relationship with US Airways. "But at that time, no one realized the impact of the regional jet on turboprop operations," Ornstein said. "So all of a sudden CCAir had regional jet competition in some of the cities they served and the traffic just evaporated." CCAir also had a very high cost structure. Ornstein tried to reduce that cost structure in order to make the airline profitable and allow the introduction of regional jets into it. Part of that cost reduction effort included renegotiating the pilots' contract.

The pilots actually agreed to a reduced pay scale to allow the airline to cut its cost. However, the president of the pilots' union, Duane Woerth of the Air Line Pilots Association (ALPA), refused to sign the contract (C/R News, Sept. 16, 2002). At that time, CCAir was losing around $1 million a month.

"Lowering the costs would not fix the company," Ornstein said. "We just had to get out of turboprops and into regional jets. Without a new pilot contract, we couldn't do that, so the company had to be shut down."

Today, Mesa Air Group consists of several separate operational units, with United Express scheduled to come on-line in July. It also has a subsidiary, Freedom Airlines, which flies as a code-sharing partner with America West.

Mesa Airlines itself is a very small airline operating five Beech 1900s out of its original base in Albuquerque. And while Ornstein believes there are still markets for turboprops, he noted that Mesa Airlines has been impacted by "turboprop avoidance."

Mesa's US Airways Express operations consist of two operating units, Mesa Jet and Air Midwest. Mesa Jet operates the Bombardier CRJ200 and Embraer ERJ145, both 50-seat aircraft. It flies seven CRJ200s and 21 ERJ145s out of US Airways' hubs in Philadelphia, Charlotte, N.C., and Washington, D.C. Air Midwest operates a fleet of 52 Beech (Raytheon) 1900Ds out of Kansas City, Mo., of which 36 are in service as a US Airways Express carrier. The remaining 1900Ds include the five used by Mesa Airlines in Albuquerque and the remainder with America West Express out of Phoenix.

Mesa signed a code-share agreement with Frontier Airlines in September 2001 calling for the operation of CRJ200s out of Frontier's Denver hub. That agreement went into effect in February 2002.

The initial America West agreement was signed in September 1992. The airline began service with a mixture of 1900Ds, Dash-8-200s and the CRJ200. However, in March 2001 the code-share agreement was extended to 2012 and provides for 43 more aircraft, including three additional CRJ200s, 20 64-seat CRJ700s and 20 80-seat CRJ900s. Mesa has already begun taking delivery of its CRJ700s and 900s. Mesa now serves 35 cities in Arizona, California, Colorado, Iowa and New Mexico out of America West's Phoenix hub

Introduction of the CRJ700s and 900s created a highly publicized controversy between Mesa and ALPA, its pilots union. Because America West does not have a scope clause in its pilots' contract, it is able to operate aircraft larger than 70 seats, giving it a distinct marketing advantage over mainline carriers limited to 70-seats and below.

However, ALPA was unwilling to agree to a salary scale that America West was willing to pay, Ornstein said. "We had hoped to avoid having to form a new subsidiary, but we had no choice. And once we moved forward, we had no problem finding enthusiastic, and highly qualified pilots, many coming as furloughed pilots from other major carriers." The subsidiary Ornstein created was Freedom Airlines, a fully certified FAR Part 121 carrier.

"But during the negotiations with ALPA, we were ultimately able to come to terms," he said. As part of the negotiations, it was agreed that the ALPA pilots would fly the aircraft, and that they would be part of a single seniority list with other Mesa pilots flying for the other express carriers. But as for the pay, "We reminded ALPA that if America West wouldn't agree to pay the pilots what they wanted, there wasn't much we could do about it. They are paid on a pay scale that our airline partners are willing to pay."

All of Mesa's regional jet operations are contracted under a revenue guarantee agreement, Ornstein said. "We have to maintain the costs, but we are guaranteed a certain amount of revenue based on a complex formula that is based on how the aircraft are operated."

The Future

Mesa is continuing to take on CRJ700s and 900s for America West, as well as "actively pursuing new business with all of our partners," Ornstein said. "We feel the future clearly is the regional jet - and we would like to see those relationships expanding. We have a lot of confidence in David Siegel at US Airways. We also think that America West could be the first carrier to return to profitability because they have been able to maintain a low cost structure. While United is going through a very difficult period, based on the strength of its route network and its ongoing restructuring efforts, we hope it will become a very important partner."

Ornstein also said that they are talking to both US Airways and United about the possibility of moving up to 70-seat aircraft for those two carriers. "Given our cost structure, it makes us very competitive. Hopefully, that will provide an opportunity for us."

As for eventually moving into aircraft even larger than the CRJ900, Ornstein said that the regionals need to learn a lesson from the Southwests, JetBlues and AirTrans of the world, that what really differentiates them is the fact that because of their costs structure, they can operate in places that the traditional carrier can't.

"Something you have to be aware of is that things change, and sometimes you have to do things that are not a part of the plan," Ornstein said.

Mesa Air Group

410 N. 44th St.
Suite 700
Phoenix, Ariz. 85008
602-685-4000
http://www.mesa-air.com

Chairman/CEO - Jonathan Ornstein
President/COO - Michael Lotz
CFO - Robert Stone
Executive VP - Peter Murnane

Fleet: 131 a/c total

2002 Statistics

  • RPMs (000 ) - 2,160,260
  • ASMs (000) - 3,668,408
  • LF - 58.9%
  • Passengers - 5,399,994
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